FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File No. 1-6112
NORTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 05-0314991
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Kennedy Plaza, Providence, RI 02903-2360
(Address of principal executive offices)
(Zip Code)
(401) 751-1600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of August 6, 1999 was
11,273,253. The number of shares of Special Common Stock outstanding as of
August 6, 1999 was 555,045.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
July 3, Dec. 31,
1999 1998
---- ----
(Unaudited)
Assets
Current Assets:
Unrestricted
Cash and cash equivalents $ 72,143 $ 87,876
Marketable securities available for 30,803 121,757
sale
Restricted
Investments and marketable securities
at cost, which approximates market 9,970 13,818
Accounts receivable, less allowances
of $11,786 and $10,657 291,320 205,359
Inventories
Raw materials 96,151 69,247
Work in process 17,359 13,010
Finished goods 98,104 80,450
---------- ----------
211,614 162,707
Prepaid expenses 13,970 10,938
Other current assets 12,837 15,513
Prepaid income taxes 60,543 54,163
---------- ----------
Total current assets 703,200 672,131
---------- ----------
Property and Equipment, at Cost:
Land 15,379 12,628
Buildings and improvements 109,017 102,455
Machinery and equipment 342,699 294,551
---------- ----------
467,095 409,634
Less accumulated depreciation 145,511 130,010
--------- ---------
Total property and equipment, net 321,584 279,624
--------- ---------
Other Assets:
Goodwill, less accumulated amortization
of $49,070 and $41,204 575,567 598,823
Intangible assets, net 108,453 73,441
Deferred debt expense 23,417 24,845
Other 42,279 41,129
---------- ----------
749,716 738,238
---------- ----------
$1,774,500 $1,689,993
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Continued)
July 3, Dec. 31,
1999 1998
---- ----
(Unaudited)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 9,490 $ 10,962
Current maturities of long-term debt 5,478 6,776
Accounts payable 166,870 120,101
Accrued expenses and taxes, net 200,001 197,085
---------- ----------
Total current liabilities 381,839 334,924
---------- ----------
Other Liabilities
Deferred income taxes 46,390 26,040
Other 98,143 104,306
---------- ----------
144,533 130,346
----------- -----------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 1,006,414 1,007,113
Stockholders' Investment:
Preference stock, $1 par value;
authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,692,385 and
18,427,595 shares issued 18,692 18,428
Special common stock, $1 par value;
authorized 5,000,000 shares; 845,760
and 854,935 shares issued 846 855
Additional paid-in capital 207,857 201,626
Retained earnings 117,266 93,966
Accumulated other comprehensive loss (13,508) (11,596)
Less --treasury common stock at cost,
7,426,713 and 7,290,335 shares (87,378) (83,711)
--treasury special common stock
at cost, 289,881 and
286,009 shares (2,061) (1,958)
------ ------
Total stockholders' investment 241,714 217,610
------- -------
$1,774,500 $1,689,993
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
For The
Three Months Ended
------------------
July 3, July 4,
1999 1998
---- ----
(Unaudited)
Net Sales $544,088 $449,647
Costs and Expenses:
Cost of products sold 384,971 333,506
Selling, general and administrative
expense 95,842 79,938
Amortization of goodwill and
intangible assets 5,055 3,049
-------- --------
485,868 416,493
-------- --------
Operating earnings 58,220 33,154
Interest expense (24,373) (19,740)
Investment income 1,653 2,086
-------- --------
Earnings before provision for income
taxes 35,500 15,500
Provision for income taxes 15,700 7,000
-------- --------
Net Earnings $19,800 $ 8,500
======== ========
Net Earnings per share of common
stock:
Basic $1.67 $ .79
===== =====
Diluted $1.64 $ .78
===== =====
Weighted Average Number of Shares:
Basic 11,850 10,718
====== ======
Diluted 12,051 10,905
====== ======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
For The
Six Months Ended
----------------
July 3, July 4,
1999 1998
------- -------
(Unaudited)
Net Sales $950,788 $842,115
Costs and Expenses:
Cost of products sold 681,887 627,826
Selling, general and administrative
expense 173,225 155,499
Amortization of goodwill and
intangible assets 9,839 5,943
-------- --------
864,951 789,268
-------- --------
Operating earnings 85,837 52,847
Interest expense (48,339) (39,198)
Investment income 4,502 4,351
-------- --------
Earnings before provision for income
taxes 42,000 18,000
Provision for income taxes 18,700 8,200
-------- --------
Net Earnings $ 23,300 $ 9,800
======== ========
Net Earnings per share of common
stock:
Basic $1.97 $ .97
===== =====
Diluted $1.94 $ .95
===== =====
Weighted Average Number of Shares:
Basic 11,798 10,129
====== ======
Diluted 11,988 10,311
====== ======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
For the
Six Months Ended
----------------
July 3, July 4,
1999 1998
------- -------
(Unaudited)
Cash Flows from operating activities:
Net earnings $ 23,300 $ 9,800
-------- -------
Adjustments to reconcile net earnings
to cash:
Depreciation and amortization expense 26,812 19,876
Non-cash interest expense 1,832 1,611
Deferred federal income tax provision 15,000 4,400
Changes in certain assets and
liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable, net (63,527) (40,952)
Prepaids and other current assets 2,973 (2,501)
Inventories (29,060) (11,761)
Net assets of discontinued operations --- (6,659)
Accounts payable 43,503 32,618
Accrued expenses and taxes (5,882) (4,281)
Long-term assets, liabilities and other,
net (1,659) (3,640)
------ ------
Total adjustments to net earnings (10,008) (11,289)
------- -------
Net cash provided by (used in)
operating activities $ 13,292 $(1,489)
-------- -------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Continued)
For the
Six Months Ended
----------------
July 3, July 4,
1999 1998
------- -------
(Unaudited)
Cash Flows from investing activities:
Capital expenditures $(25,349) $(15,507)
Net cash paid for businesses acquired (86,571) ---
Purchase of investments and marketable
securities (54,310) ---
Proceeds from the sale of investments
and marketable securities 145,538 23,978
Proceeds from businesses sold, net --- 24,937
Change in restricted cash
and investments 3,798 ---
Other, net (5,573) (5,048)
------ ------
Net cash(used in)provided by investing
activities (22,467) 28,360
-------- --------
Cash Flows from financing activities:
Net proceeds from the sale of Nortek
Common Stock --- 64,190
Payment of borrowings, net (2,734) (10,312)
Purchase of Nortek Common and Special
Common Stock (3,770) (6,574)
Other, net (54) 1,602
-------- --------
Net cash (used in) provided by (6,558) 48,906
-------- -------
financing activities
Net (decrease)increase in unrestricted
cash and cash equivalents (15,733) 75,777
Unrestricted cash and cash equivalents
at the beginning of the period 87,876 125,842
------ -------
Unrestricted cash and cash equivalents
at the end of the period $ 72,143 $201,619
======== ========
Interest paid $ 45,992 $ 40,301
======== ========
Income taxes paid, net $ 7,736 $ 3,856
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED JULY 4, 1998
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income(Loss) Income(Loss)
----- ----- ------- -------- ----- ------------ ------------
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 4, 1998 $16,213 $865 $136,736 $60,266 $(84,356) $(6,033) $ ---
Net earnings --- --- --- 8,500 --- --- 8,500
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (940) (940)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- 70 70
------
Comprehensive income $7,630
======
Sale of 2,182,500
shares of common stock 2,182 --- 62,207 --- --- ---
4,459 shares of special
common stock converted
into 4,459 shares of
common stock 5 (5) --- --- --- ---
8,996 shares of common
stock issued upon
exercise of stock
options 9 --- (57) --- --- ---
Other --- --- --- --- 68 ---
------- ---- -------- ------- -------- -------
Balance, July 4, 1998 $18,409 $860 $198,886 $68,766 $(84,288) $(6,903)
======= ==== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income(Loss) Income(Loss)
----- ----- ------- -------- ----- ------------ -----------
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 3, 1999 $18,680 $849 $207,796 $97,466 $(88,059) $(12,592) $ ---
Net earnings --- --- --- 19,800 --- --- 19,800
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (941) (941)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- 25 25
-------
Comprehensive income $18,884
=======
2,893 shares of
special common stock
converted into 2,893
shares of common stock 3 (3) --- --- --- ---
9,750 shares of common
stock issued upon
exercise of stock
options 9 --- 61 --- --- ---
50,742 shares of
treasury stock
acquired --- --- --- --- (1,380) ---
_______ ____ ________ _______ ________ ________
Balance, July 3, 1999 $18,692 $846 $207,857 $117,266 $(89,439) $(13,508)
======= ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE SIX MONTHS ENDED JULY 4, 1998
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income(Loss) Income(Loss)
----- ----- -------- -------- ----- ------------ ------------
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 $16,051 $767 $135,345 $58,966 $(77,714) $(5,327) $ ---
Net earnings --- --- --- 9,800 --- --- 9,800
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (1,597) (1,597)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- 121 121
Minimum pension
liability net of $65
tax benefit --- --- --- --- --- (100) (100)
------
Comprehensive income $8,224
======
Sale of 2,182,500
shares of common stock 2,182 --- 62,207 --- --- ---
8,156 shares of special
common stock converted
into 8,156 shares of
common stock 8 (8) --- --- --- ---
167,982 shares of common
stock and 100,991
shares of special
common stock issued
upon exercise of stock
options 168 101 1,334 --- --- ---
205,423 shares of
treasury stock acquired --- --- --- --- (6,574) ---
------- ---- ----- ------- -------- -------
Balance, July 4, 1998 $18,409 $860 $198,886 $68,766 $(84,288) $(6,903)
======= ==== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE SIX MONTHS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income(Loss) Income(Loss)
----- ----- ------- -------- ----- ------------ ------------
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) $ ---
Net earnings --- --- --- 23,300 --- --- 23,300
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (2,149) (2,149)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- 237 237
-------
Comprehensive income $21,388
=======
9,175 shares of
special common stock
converted into 9,175
shares of common stock 9 (9) --- --- --- ---
20,615 shares of common
Stock issued upon
exercise of
stock
options 20 --- 151
140,250 shares of
treasury stock
acquired --- --- --- --- (3,770) ---
235,000 shares of common
stock issued as
partial consideration
for an acquisition 235 --- 6,080 --- --- ---
_______ ____ ________ _______ _______ ______
Balance, July 3, 1999 $18,692 $846 $207,857 $117,266 $(89,439) $(13,508)
======= ==== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(A) The unaudited condensed consolidated financial statements (the "Unaudited
Financial Statements") presented have been prepared by Nortek, Inc. and
include the accounts of Nortek, Inc., and all of its significant wholly
owned subsidiaries (the "Company") after elimination of intercompany
accounts and transactions, without audit and, in the opinion of management,
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the interim periods presented. Although certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted, the Company believes that the disclosures included are adequate to
make the information presented not misleading. Certain amounts in the
Unaudited Financial Statements for prior periods have been reclassified to
conform to the July 3, 1999 presentation. It is suggested that these
Unaudited Financial Statements be read in conjunction with the financial
statements and the notes included in the Company's latest Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
(B) During the second quarter of 1998, the Company sold, in a public offering,
2,182,500 shares of its common stock for net proceeds of approximately
$64,190,000 (the "Common Stock Offering").
(C) Acquisitions are accounted for as purchases and, accordingly, have been
included in the Company's consolidated results of operations since the
acquisition date. Purchase price allocations are subject to refinement
until all pertinent information regarding the acquisitions is obtained.
(D) On July 31, 1998, the Company, through a wholly owned subsidiary, purchased
all of the issued and outstanding capital stock of NuTone Inc. ("NuTone"),
a wholly owned subsidiary of Williams plc ("Williams") for an aggregate
purchase price of $242,500,000 in cash plus approximately $5,500,000 in
expenses and fees. The purchase price was funded through the use of the net
proceeds from the sale of $210,000,000 principal amount of 8 7/8% Senior
Notes due August 1, 2008 (the "8 7/8% Notes") at a slight discount, which
occurred on July 31, 1998, together with approximately $44,800,000 of the
cash proceeds received from the Common Stock Offering.
(E) The following presents the approximate unaudited Pro Forma net sales,
depreciation and amortization expense (other than amortization of deferred
debt expense and debt discount), operating earnings, earnings from
continuing operations and diluted earnings per share from continuing
operations of the
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
Company for the three months and six months ended July 4, 1998 and the year
ended December 31, 1998 and gives pro forma effect to the Common Stock
Offering, the sale of the 8 7/8% Notes and the acquisition of NuTone on
July 31, 1998, and reflects the estimated cost reductions directly
attributable to the NuTone acquisition as described below as if such
transactions had occurred on January 1, 1998. The Pro Forma results for the
year ended December 31, 1998 below include the actual results of NuTone
since July 31, 1998 in accordance with the purchase method of accounting
for an acquisition. Pro Forma operating results do not give pro forma
effect to dispositions of businesses that occurred in 1998, the acquisition
of Napco, Inc. which occurred on October 9, 1998 or acquisitions in 1999.
(See Notes I, J and K).
Three Months Six Months Year
Ended Ended Ended
July 4, July 4, December 31,
1998 1998 1998
---- ---- ----
(In thousands except per share
amounts)
(unaudited)
Pro Forma
Net sales $495,000 $937,000 $1,849,000
Depreciation and
amortization expense 12,100 24,300 47,400
Operating earnings 38,000 61,000 142,500
Earnings from continuing
operations 8,000 8,600 31,400
Diluted earnings per
share from continuing
operations $ .67 $ .72 $2.63
At the date of the NuTone acquisition, the Company achieved cost reductions
directly attributable to the acquisition from the elimination of fees and
charges paid by NuTone to Williams and related entities. The unaudited Pro
Forma operating earnings have been increased for the year ended December
31, 1998 and six months ended July 4, 1998 by approximately $354,000 and
$384,000, respectively, and have been decreased for the three months ended
July 4, 1998 by approximately $98,000 to reflect the elimination of such
fees. Subsequent to the NuTone acquisition, the Company expects to realize
approximately $15,000,000 in unaudited estimated annual cost reductions
("NuTone Cost Reductions")
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
that can be achieved as a result of integrating NuTone into the Company's
operations. Pro Forma earnings have not been increased for the NuTone Cost
Reductions for the periods presented, except for NuTone Cost Reductions
actually achieved since the date of acquisition. The NuTone Cost Reductions
are estimates and actual savings achieved could differ materially.
In computing the Pro Forma earnings, earnings have been reduced by the net
interest income on the aggregate cash portion of the purchase price of the
NuTone acquisition at the historical rate earned by the Company and
interest expense on indebtedness incurred in connection with the
acquisition of NuTone. Earnings have also been reduced by amortization of
goodwill and intangible assets and reflect net adjustments to depreciation
expense as a result of an increase in the estimated fair market value of
property and equipment and changes in depreciable lives. Interest expense
was included on the 8 7/8% Notes at the applicable coupon rate plus
amortization of deferred debt expense and debt discount, net of tax effect.
The Pro Forma information presented does not purport to be indicative of
the results which would have been reported if these transactions had
occurred on January 1, 1998, or which may be reported in the future.
(F) The Company's Board of Directors has authorized a number of programs to
purchase shares of the Company's Common and Special Common Stock. The most
recent of these programs was announced on May 20, 1999, and allows the
Company to purchase up to 500,000 shares of the Company's Common and
Special Common Stock in open market or negotiated transactions, subject to
market conditions, cash availability and provisions of the Company's
outstanding debt instruments. As of August 6, 1999, the Company has
purchased approximately 21,100 shares of its Common and Special Common
Stock under this program for approximately $691,800 and accounted for such
share purchases as Treasury Stock.
At August 6, 1999 and approximately $80,584,000 was available for the
payment of cash dividends, stock purchases or other restricted payments as
defined under the terms of the Company's most restrictive Indenture.
(G) Basic earnings per share amounts have been computed using the weighted
average number of common and common equivalent shares outstanding during
each period. Special Common Stock is treated as the equivalent of Common
Stock in determining
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
earnings per share results. Diluted earnings per share amounts have been
computed using the weighted average number of common and common equivalent
shares and the dilutive potential common and special common shares
outstanding during each period.
A reconciliation between basic and diluted earnings per share from
continuing operations is as follows:
Three Six
Months Ended Months Ended
------------ ------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands except per share
amounts)
Net earnings $19,800 $ 8,500 $23,300 $ 9,800
Basic EPS:
Basic common shares 11,850 10,718 11,798 10,129
====== ====== ====== ======
Basic EPS $1.67 $ .79 $1.97 $ .97
===== ===== ===== ======
Diluted EPS:
Basic common shares 11,850 10,718 11,798 10,129
Plus: Impact of stock
options 201 187 190 182
------ ------ ------ ------
Diluted common shares 12,051 10,905 11,988 10,311
====== ====== ====== ======
Diluted EPS $1.64 $ .78 $1.94 $ .95
===== ===== ===== =====
(H) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be
applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
The Company is in the process of quantifying the impacts of adopting SFAS
133 on its financial statements and has not determined the timing of or
method of adoption.
(I) On March 8, 1999, the Company acquired Webco, Inc. ("Webco"), a designer
and manufacturer of custom air handling equipment for industrial,
institutional and commercial customers. For the fiscal year ended October
31, 1998, Webco had net sales of approximately $13,900,000.
(J) On April 23, 1999, the Company completed the acquisition of three
businesses from Caradon plc of the United Kingdom: Peachtree Doors and
Windows, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired
Companies"). Peachtree Doors and Windows, based in Norcross, Georgia, is a
national supplier of premium residential windows, entry doors and patio
doors that target custom and high-end home markets. Thermal-Gard, based in
Punxsutawney, Pennsylvania, manufactures premium replacement windows, patio
doors and sunrooms. CWD Windows and Doors, headquartered in Calgary,
Alberta, is a leading provider of complete window and door systems for new
homes in Western Canada. For the year ended December 31, 1998, the Caradon
Acquired Companies had combined net sales of approximately $169,700,000.
(K) On May 28, 1999, the Company acquired Multiplex Technologies, Inc.
("Multiplex"), a leading manufacturer and designer of high-performance,
multi-room video distribution equipment for home automation/home
entertainment. Multiplex had net sales of approximately $10,000,000 for the
year ended December 31, 1998.
(L) Effective in 1998, the Company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement
introduced a new model for segment reporting, called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. The presentation for the three months
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
and six months ended July 3, 1999 and July 4, 1998 is consistent with the
presentation in the Company's 1998 Form 10-K. There have been no changes in
the Company's segment reporting in 1999.
The Company has three reportable segments: the Residential Building
Products Segment; the Air Conditioning and Heating Products Segment; and
the Windows, Doors and Siding Segment. Other includes corporate related
items, results of insignificant operations, intersegment eliminations and
certain income and expense items not allocated to reportable segments. The
operating results labeled Businesses sold consist of entities sold during
1998 that were previously included in the Company's former Specialty
Products and Distribution Group as well as other businesses sold during
1998.
The Company evaluates segment performance based on operating earnings
before allocations of corporate overhead costs. The income statement impact
of all purchase accounting adjustments, including goodwill and intangible
assets amortization, is included in the operating earnings of the
applicable segment. Intersegment net sales and eliminations were not
material for any of the periods presented.
The tables that follow exclude the results of operations for the plumbing
products business, which was sold in 1998 and had been accounted for as a
discontinued operation.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
Summarized financial information for the Company's reportable segments is
presented in the tables that follow for the three months and six months
ended July 3, 1999 and July 4, 1998.
Three Six
Months Ended Months Ended
------------ ------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands)
Net Sales:
Residential building products $161,074 $ 96,079 $315,368 $201,158
Air conditioning and heating
products 157,312 133,794 273,746 234,670
Windows, doors and siding 205,540 141,142 322,971 240,371
Other 20,162 17,239 38,703 33,083
-------- -------- -------- --------
544,088 388,254 950,788 709,282
Businesses sold --- 61,393 --- 132,833
-------- -------- -------- --------
Consolidated net sales $544,088 $449,647 $950,788 $842,115
======== ======== ======== ========
Operating Earnings (Loss):
Residential building products $23,434 $ 9,727 $42,581 $20,714
Air conditioning and heating
products 19,540 16,437 31,255 27,219
Windows, doors and siding 21,370 10,096 21,151 7,955
Other, net ( 6,124) (4,940) ( 9,150) (7,717)
------- ------- ------- -------
58,220 31,320 85,837 48,171
Businesses sold --- 1,834 --- 4,676
------- ------- ------- -------
Consolidated operating
earnings 58,220 33,154 85,837 52,847
Unallocated:
Interest expense (24,373) (19,740) (48,339) (39,198)
Investment income 1,653 2,086 4,502 4,351
------- ------- ------- -------
Earnings before provision
forincome taxes $35,500 $15,500 $42,000 $18,000
======= ======= ======= =======
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
Three Six
Months Ended Months Ended
------------ ------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands)
Depreciation and Amortization:
Residential building products $ 5,038 $2,667 $10,060 $ 5,387
Air conditioning and heating
products 2,627 2,282 5,212 4,494
Windows, doors and siding 5,609 4,001 10,558 8,156
Other 497 347 982 682
------- ------ ------- -------
13,771 9,297 26,812 18,719
Businesses sold --- 601 --- 1,157
------- ------ ------- -------
Consolidated depreciation
and amortization $13,771 $9,898 $26,812 $19,876
======= ====== ======= =======
(M) The Company's plans for eliminating certain activities of the 1998 and 1999
acquisitions were not completely finalized as of July 3, 1999. The Company
expects to finalize its plans with respect to the 1998 and 1999
acquisitions within one year of the respective acquisition dates and,
accordingly, additional liabilities will be recorded as adjustments to the
purchase price allocation for certain of the acquired businesses. For the
six months ended July 3, 1999, the Company recorded liabilities of
approximately $3,400,000 related primarily to employee termination costs.
The Company estimates that it will record additional liabilities associated
with these integration plans for the 1998 acquisitions in the range of
between $6,000,000 and $12,000,000 for acquisitions prior to 1999 relating
principally to additional employee terminations and other exit costs from
the elimination of certain products and the consolidation of certain
functions and operations at the acquired businesses. The Company is in the
process of finalizing its acquisition accounting for businesses acquired in
1999 and expects to incur minimal exit costs.
Charges to the liabilities for employee terminations include payroll,
payroll taxes and insurance benefits related to severance packages and were
approximately $1.4 million and $2.6 million for the three months and six
months ended July 3, 1999, respectively. Charges to the liabilities for
other exit costs relate principally to other costs of exiting or closing
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999 AND JULY 4, 1998
(Continued)
facilities and legal and consulting fees that were incurred due to the
implementation of the company's exit strategies. Charges to the liabilities
for other exit costs were approximately $200,000 and $400,000 for the three
months and six months ended July 3, 1999, respectively.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
Effective in 1998, the Company adopted SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information" and, accordingly, the information for
all periods presented has been reclassified to conform to the presentation for
July 3, 1999.
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment, the Air Conditioning and Heating Products Segment, and the
Windows, Doors and Siding Segment. Other includes corporate related items,
results of insignificant operations and certain income and expense not allocable
to reportable segments. The results of operations and other data relating to
Businesses sold have been presented separately. Through these principal
segments, the Company manufactures and sells, primarily in the United States,
Canada and Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, the do-it-yourself ("DIY") and professional
remodeling and renovation markets.
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, do-it-yourself and
professional remodeling and renovation markets including kitchen range hoods,
bath fans and combination units (fan, heater and light combinations). The Air
Conditioning and Heating Products Segment manufactures and sells heating,
ventilating, and air conditioning ("HVAC") systems for custom-designed
commercial applications and for manufactured and site-built residential housing.
The Windows, Doors and Siding Segment manufactures and distributes vinyl and
wood windows, entry doors, patio doors, vinyl siding, aluminum trim coil,
soffit, skirting and shutters for use in the residential construction, DIY and
professional renovation markets.
The Company acquired NuTone on July 31, 1998, Napco on October 9, 1998, Webco on
March 8, 1999, Peachtree Windows and Doors, Thermal-Gard and CWD Windows and
Doors (the "Caradon Acquired Companies") on April 23, 1999 and Multiplex on May
28, 1999. (See Notes D, I, J and K). These acquisitions have been accounted for
under the purchase method of accounting. Accordingly, the results of NuTone,
Napco, Webco, the Caradon Acquired Companies and Multiplex are included in the
Company's consolidated results since the date of their acquisition.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
The tables that follow exclude the results of operations for the plumbing
products business, which was sold on July 10, 1998 and had been accounted for as
a discontinued operation.
During 1998, the Company made several dispositions of non-strategic assets
acquired in the 1997 acquisition of Ply Gem Industries, Inc. ("Ply Gem"). On May
8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley was
treated as an operation held for sale since the acquisition of Ply Gem and
accordingly Studley's operating results are not included in the Company's
consolidated financial results. Four additional Ply Gem subsidiaries were sold
during 1998. On May 22, 1998, the Company sold Sagebrush Sales; Inc., on July 2,
1998, the Company sold Goldenberg Group; Inc., on July 31, 1998 the Company sold
the Ply Gem Manufacturing division of Ply Gem; and on December 10, 1998, the
Company sold Allied Plywood Corporation. Additionally, on December 30, 1998 the
Company sold its M&S Systems LP subsidiary and Moore-O-Matic, Inc. The operating
results of these 1998 dispositions are included in the Company's 1998
consolidated results to the date of sale. For the second quarter of 1998, the
combined net sales, operating earnings and earnings before provision for income
taxes of these dispositions were approximately $61,393,000, $1,834,000 and
$1,834,000, respectively. For the first six months of 1998, the combined net
sales, operating earnings and earnings before provision for income taxes of
these dispositions were approximately $132,833,000, $4,676,000 and $4,676,000,
respectively.
The Company does not expect the effect of Businesses sold during 1998 to be
significant to the Company's future operations.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Results of Operations
- ---------------------
The tables that follow present the unaudited net sales and operating earnings
for the Company's principal segments for the second quarter and six months ended
July 3, 1999 and July 4, 1998, and the dollar amount and percentage change of
such results as compared to the prior comparable period. The amounts in the
tables for the prior comparable period have been reclassified to conform to the
presentation for 1999.
Change in
Second Quarter Second Quarter 1999
July 3, July 4, as Compared to 1998
1999 1998 $ %
---- ---- ---- ----
(Dollar amounts in thousands)
Net Sales:
- ----------
Residential building
products $161,074 $96,079 $64,995 67.6%
Air conditioning and
heating products 157,312 133,794 23,518 17.6
Windows, doors and siding 205,540 141,142 64,398 45.6
Other 20,162 17,239 2,923 17.0
-------- -------- -------
544,088 388,254 155,834 40.1
Businesses sold --- 61,393 (61,393) (100.0)
-------- -------- -------
$544,088 $449,647 $94,441 21.0%
======== ======== =======
Operating Earnings:
- -------------------
Residential building
products $23,434 $9,727 $13,707 140.9%
Air conditioning and
heating products 19,540 16,437 3,103 18.9
Windows, doors and siding 21,370 10,096 11,274 111.7
Other (6,124) (4,940) (1,184) 24.0
------- ------- -------
58,220 31,320 26,900 85.9
Businesses sold --- 1,834 (1,834) (100.0)
------- ------- -------
$58,220 $33,154 $25,066 75.6%
======= ======= =======
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Change in
Six Months Ended First Six Months 1999
July 3, July 4, as Compared to 1998
1999 1998 $ %
---- ---- ----- ------
(Dollar amounts in thousands)
Net Sales:
- ----------
Residential building
products $315,368 $201,158 $114,210 56.8%
Air conditioning and
heating products 273,746 234,670 39,076 16.7
Windows, doors and siding 322,971 240,371 82,600 34.4
Other 38,703 33,083 5,620 17.0
-------- -------- --------
950,788 709,282 241,506 34.0
Businesses sold --- 132,833 (132,833) (100.0)
-------- -------- --------
$950,788 $842,115 $108,673 12.9%
======== ======== ========
Operating Earnings:
- -------------------
Residential building
products $42,581 $20,714 $21,867 105.6%
Air conditioning and
heating products 31,255 27,219 4,036 14.8
Windows, doors and siding 21,151 7,955 13,196 165.9
Other (9,150) (7,717) (1,433) 18.6
------- ------- -------
85,837 48,171 37,666 78.2
Businesses sold --- 4,676 (4,676) (100.0)
------- ------- -------
$85,837 $52,847 $32,990 62.4%
======= ======= =======
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
The tables that follow, set forth, for the periods presented, (a) certain
unaudited consolidated operating results, (b) the change in the amount and the
percentage change of such results as compared to the prior comparable period,
(c) the percentage which such results bear to net sales, and (d) the change of
such percentages as compared to the prior comparable period. The results of
operations for the second quarter and six months ended July 3, 1999 are not
necessarily indicative of the results of operations to be expected for any other
interim period or the full year.
Change in
Second Quarter Ended Second Quarter 1999
July 3, July 4, as Compared to 1998
1999 1998 $ %
---- ---- ------ ------
(Dollar amounts in millions)
Net sales $544.1 $449.6 $94.5 21.0%
Cost of products sold 385.0 333.5 (51.5) (15.4)
Selling, general and
administrative expense 95.8 79.9 (15.9) (20.0)
Amortization of goodwill
and intangible assets 5.1 3.1 (2.0) (64.5)
------ ------ -----
Operating earnings 58.2 33.1 25.1 75.8
Interest expense (24.4) (19.7) (4.7) (23.9)
Investment income 1.7 2.1 (.4) (19.0)
------ ------ -----
Earnings before provision
for income taxes 35.5 15.5 20.0 129.0
Provision for income taxes 15.7 7.0 (8.7) (124.3)
------ ------ -----
Net earnings $ 19.8 $ 8.5 $11.3 132.9%
====== ====== =====
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Percentage of Net Sales Change in Percentage
Second Quarter Ended for the Second Quarter
July 3, July 4, 1999
1999 1998 as Compared to 1998
---- ---- -------------------
Net sales 100.0% 100.0% ---%
Cost of products sold 70.8 74.2 3.4
Selling, general and
administrative expense 17.6 17.7 .1
Amortization of goodwill
and intangible assets .9 .7 (.2)
----- ----- ----
Operating earnings 10.7 7.4 3.3
Interest expense (4.5) (4.4) (.1)
Investment income .3 .5 (.2)
----- ----- ----
Earnings before provision
for income taxes 6.5 3.5 3.0
Provision for income taxes 2.9 1.6 (1.3)
----- ----- ----
Net earnings 3.6% 1.9% 1.7%
===== ===== ====
Change in
Six Months Ended First Six Months 1999
July 3, July 4, as Compared to 1998
1999 1998 $ %
---- ---- ----- -----
(Dollar amounts in
millions)
Net sales $950.8 $842.1 $108.7 12.9%
Cost of products sold 681.9 627.8 (54.1) (8.6)
Selling, general and
administrative expense 173.3 155.5 (17.8) (11.4)
Amortization of goodwill
and intangible assets 9.8 6.0 (3.8) (63.3)
------ ------ ------
Operating earnings 85.8 52.8 33.0 62.5
Interest expense (48.3) (39.2) (9.1) (23.2)
Investment income 4.5 4.4 .1 2.3
------ ------ ------
Earnings before provision
for income taxes 42.0 18.0 24.0 133.3
Provision for income taxes 18.7 8.2 (10.5) (128.0)
------ ------ ------
Net earnings $ 23.3 $ 9.8 $ 13.5 137.8%
====== ====== ======
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Percentage of Net Change in
Sales Percentage
Six Months Ended for the First
July 3, July 4, Six Months 1999
1999 1998 as Compared to 1998
------- ------- -------------------
Net sales 100.0% 100.0% ---%
Cost of products sold 71.7 74.6 2.9
Selling, general and
administrative expense 18.3 18.4 .1
Amortization of goodwill
and intangible assets 1.0 .7 (.3)
----- ----- -----
Operating earnings 9.0 6.3 2.7
Interest expense (5.1) (4.7) (.4)
Investment income .5 .5 ---
----- ----- -----
Earnings before provision
for income taxes 4.4 2.1 2.3
Provision for income 1.9 .9 (1.0)
----- ----- -----
taxes
Net earnings 2.5% 1.2% 1.3%
===== ===== =====
Net sales increased approximately $94,500,000 or approximately 21.0%(or
increased approximately $95,300,000 or approximately 21.2% excluding the effect
of changes in foreign exchange rates) for the second quarter of 1999, as
compared to 1998 and increased approximately $108,700,000 or approximately
12.9%(or increased approximately $109,700,000 or approximately 13.0% excluding
the effect of changes in foreign exchange rates) for the first six months of
1999, as compared to 1998, principally as a result of acquisitions and higher
sales volume, partially offset by the effect of Businesses sold. Acquisitions
contributed, approximately $54,500,000 of the total increase in net sales of
approximately $65,000,000 in the second quarter and approximately $102,600,000
of the total increase in net sales of approximately $114,200,000 in the first
six months in the Residential Building Products Segment. Increased domestic
sales volume, partially offset by the effects of changes in foreign exchange
rates accounted for the balance of the increase in this segment. Net sales in
the Air Conditioning and Heating Products Segment increased approximately
$23,500,000 or 17.6% in the second quarter of 1999 and increased approximately
$39,100,000 or 16.7% in the first six months of 1999. The increase is
principally as a result of higher sales volume in this Segment. In addition,
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
approximately $3,500,000 and $5,300,000 in the second quarter and first six
months of 1999, respectively, of the increase in net sales in this segment was
from an acquisition. Acquisitions contributed approximately $67,700,000 in the
second quarter and approximately $86,400,000 in the first six months in net
sales to the Windows, Doors, and Siding Segment. This increase was partially
offset by the effect of lower sales volume of lower margin vinyl windows, due to
delays in the relocation (and ramp up of the production) of low margin vinyl
windows to a lower cost manufacturing facility by this segment. These increases
in net sales were partially offset by the effect of approximately $61,400,000
and $132,800,000 of lower net sales attributable to Businesses sold in 1998 in
the second quarter and first six months, respectively.
Cost of products sold as a percentage of net sales decreased from approximately
74.2% in the second quarter of 1998 to approximately 70.8% in the second quarter
of 1999, and decreased from approximately 74.6% in the first six months of 1998
to approximately 71.7% in the first six months of 1999. Changes in the
percentages were, in large part, affected by acquisitions and Businesses sold in
1998. Excluding the effect of Businesses sold, cost of products sold as a
percentage of net sales decreased from approximately 73.5% in the second quarter
of 1998 to approximately 70.8% in the second quarter of 1999 and decreased from
approximately 73.9% in the first six months of 1998 to approximately 71.7% in
the first six months of 1999. These decreases in the percentages principally
resulted from acquisitions (which have a lower level of cost of sales than the
overall group of businesses owned prior to such acquisitions). To a lesser
extent, a reduction in the level of costs in the window operations of the
Company's Windows, Doors and Siding Segment and the effect of higher sales
levels in the Residential Building Products Segment without a proportionate
increase in costs also contributed to the decreases in the percentages.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Overall, changes in the cost of products sold as a percentage of net sales for
one period as compared to another period may reflect a number of factors
including changes in the relative mix of products sold, the effect of changes in
sales prices, material costs and changes in productivity levels.
Selling, general and administrative expense as a percentage of net sales
decreased slightly from approximately 17.7% in the second quarter of 1998 to
approximately 17.6% in the second quarter of 1999 and from approximately 18.4%
in the first six months of 1998 to approximately 18.3% in the first six months
of 1999. These decreases in the percentages were principally affected as a
result of acquisitions and Businesses sold in 1998. Excluding the effect of
Businesses sold, selling, general and administrative expense as a percentage of
net sales remained flat at approximately 17.6% in the second quarter of 1998 and
1999 and decreased from approximately 18.5% in the first six months of 1998 to
approximately 18.3% in the first six months of 1999. The decrease in the
percentage in the first six months is principally as a result of an increase in
net sales in the Air Conditioning and Heating Products Segment without a
proportionate increase in expense. The effect of the Windows, Doors and Siding
segment acquisitions (which have a lower level of expense as a percentage of net
sales than the overall group of businesses owned prior to such acquisitions) was
offset by the effect of the acquisitions in the Residential Building Products
Segment (which have a higher level of expense as a percentage of net sales than
the overall group of businesses owned prior to such acquisitions.)
Amortization of goodwill and intangible assets, as a percentage of net sales,
increased from approximately .7% of net sales in the second quarter of 1998 to
approximately .9% of net sales in the second quarter of 1999 and increased from
approximately .7% of net sales in the first six months of 1998 to approximately
1.0% of net sales in the first six months of 1999, principally as a result of
acquisitions.
Consolidated operating earnings increased approximately $25,100,000 from
approximately $33,100,000 in the second quarter of 1998 as compared to
approximately $58,200,000 in the second quarter of 1999 and increased
approximately $33,000,000 from approximately $52,800,000 in the first six months
of 1998 as compared to approximately $85,800,000 for the first six months of
1999. Businesses acquired in 1998 and 1999 contributed approximately $17,900,000
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
of the increase in the second quarter, of which approximately $8,600,000 was in
the Windows, Doors and Siding Segment, $250,000 was in the Air Conditioning and
Heating Products Segment and $9,050,000 was in the Residential Building Products
Segment. Businesses acquired in 1998 and 1999 contributed approximately
$25,900,000 of the increase in the first six months (including approximately
$6,500,000 of estimated synergies and cost reductions realized from the
integration of NuTone into the Company's existing businesses), of which
approximately $8,900,000 was in the Windows, Doors and Siding Segment, $700,000
was in the Air Conditioning and Heating Products Segment and $16,300,000 was in
the Residential Building Products Segment. Consolidated operating earnings have
been reduced by depreciation and amortization expense of approximately
$13,800,000 and approximately $9,900,000 for the second quarter of 1999 and
1998, respectively, and have been reduced by depreciation and amortization
expense of approximately $26,800,000 and approximately $19,900,000 for the first
six months of 1999 and 1998, respectively. Businesses acquired contributed
approximately $3,600,000 of the increase in depreciation and amortization
expense in the second quarter of 1999, of which approximately $1,400,000 was in
the Windows, Doors and Siding Segment and $2,100,000 was in the Residential
Building Products Segment. Businesses acquired contributed approximately
$6,400,000 of the increase in depreciation and amortization expense in the first
six months of 1999, of which approximately $2,100,000 was in the Windows, Doors
and Siding Segment and $4,200,000 was in the Residential Building Products
Segment. Depreciation and amortization expense relating to the operating results
of Businesses sold in 1998 was approximately $600,000 and $1,200,000 for the
second quarter and first six months of 1998, respectively. The increase in
operating earnings was also due, in part, to lower costs and expenses
(approximately $2,700,000 in the second quarter and $4,300,000 in the first six
months, excluding the contribution from acquisitions) in the Windows, Doors and
Siding Segment, increased sales volume without a proportionate increase in costs
and expenses in the Residential Building Products Segment (approximately
$4,700,000 in the second quarter and $5,600,000 in the first six months,
excluding the contribution from acquisitions) and the Air Conditioning and
Heating Products Segment (approximately $2,900,000 in the second quarter and
$3,300,000 in the first six months, excluding the contribution from
acquisitions). These increases in operating earnings were partially offset by
the effect of approximately $1,800,000 and $4,600,000 for Businesses sold in
1998, in the second quarter and first six months of 1998, respectively.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Operating earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries which manufacture
built-in ventilation products and window and door systems, were approximately
5.9% and 4.9% of operating earnings (before corporate overhead) in the second
quarter of 1999 and 1998, respectively, and were approximately 5.3% and 6.4% of
operating earnings (before corporate overhead) in the first six months of 1999
and 1998, respectively. The decline in foreign operating earnings as a
percentage of net sales in the first six months of 1999 as compared to 1998 is
principally a result of the increased domestic sales and operating earnings from
acquisitions. Sales and earnings derived from the international market are
subject to the risks of currency fluctuations.
Interest expense in the second quarter of 1999 increased approximately
$4,700,000 or approximately 23.9% as compared to the second quarter of 1998, and
increased approximately $9,100,000 or approximately 23.2% in the first six
months of 1999 as compared to the first six months of 1998 primarily as a result
of the sale of the 8 7/8% Notes on July 31, 1998. This increase was partially
offset by the paydown of approximately $27,700,000 of debt with a portion of the
proceeds from the sale of businesses in 1998.
Investment income decreased approximately $400,000 or approximately 19.0% in the
second quarter of 1999 as compared to the second quarter of 1998 and increased
approximately $100,000 or approximately 2.3% in the first six months of 1999 as
compared to the first six months of 1998. The decrease in the second quarter of
1999 is principally due to lower average invested balances and lower yields
earned on short-term investments and marketable securities. The slight increase
in the first six months is principally the result of higher invested balances
primarily in the first quarter of 1999. This increase was partially offset by
lower yields earned on short-term investments and marketable securities.
The provision for income taxes was approximately $15,700,000 for the second
quarter of 1999, as compared to $7,000,000 for the second quarter of 1998 and
approximately $18,700,000 for the first six months of 1999, as compared to
$8,200,000 for first six months of 1998. The income tax rates differed from the
United States Federal statutory rate of 35% principally as a result of state
income tax provisions, nondeductible amortization expense (for tax purposes),
changes in tax reserves, the effect of foreign income tax on foreign source
income and the effect of product development tax credits from foreign
operations.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged and expects to continue to be highly leveraged
for the foreseeable future. At July 3, 1999, the Company had consolidated debt
of approximately $1,021,400,000 consisting of (i) $15,000,000 of short-term
borrowings and current maturities of long-term debt, (ii) $111,300,000 of notes,
mortgage notes and other indebtedness,(iii) $209,300,000 of the 8 7/8% Notes,
(iv) $174,100,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes"), (v)
$203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes")
and (vi) $307,800,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes"). At
July 3, 1999, the Company had consolidated unrestricted cash, cash equivalents
and marketable securities of approximately $102,900,000 as compared to
approximately $209,600,000 at December 31, 1998 and the Company's debt to equity
ratio was approximately 4.2:1 at July 3, 1999 as compared to 4.7:1 at December
31, 1998.
The Company's ability to pay interest on or to refinance its indebtedness
depends on the successful integration of the operations of recent acquisitions
and the Company's future performance, which, in part, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. There can be no assurance that the Company will generate
sufficient cash flow from the operation of its subsidiaries or that future
financings will be available on acceptable terms or in amounts sufficient to
enable the Company to service or refinance its indebtedness, or to make
necessary capital expenditures.
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and possible dispositions of certain of its businesses
on an ongoing basis and at any given time may be engaged in discussions or
negotiations with respect to possible acquisitions or dispositions. Acquisitions
in 1999 were funded through the use of unrestricted cash, investments and the
issuance of the Company's Common Stock.
The indentures and other agreements governing the Company and its subsidiaries'
indebtedness (including the indentures for the 8 7/8% Notes, the 9 1/4% Notes,
the 9 7/8% Notes and the 9 1/8% Notes and a credit agreement for the Ply Gem
credit facility) contain restrictive financial and operating covenants including
covenants that restrict the ability of the Company and its subsidiaries to
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
complete acquisitions, pay dividends, incur indebtedness, make investments, sell
assets and take certain other corporate actions.
The Company expects to meet its cash flow requirements through fiscal 1999 from
cash generated from operations, existing cash, cash equivalents and marketable
securities, and financings, which may include securitization of accounts
receivable and mortgage or capital lease financings.
On March 8, 1999 the Company acquired Webco, a designer and manufacturer of
custom air handling equipment. For the year ended October 31, 1998, Webco had
net sales of approximately $13,900,000.
On April 23, 1999, the Company acquired the Caradon Acquired Companies from
Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of
Caradon plc, a United Kingdom company. The Caradon Acquired Companies
manufacture and sell premium residential windows, entry doors and patio doors to
both the new construction and replacement markets. The purchase price was funded
through the use of unrestricted cash and investments in the second quarter of
1999. For the year ended December 31, 1998, the Caradon Acquired Companies had
combined net sales of approximately $169,700,000.
On May 28, 1999, the Company acquired Multiplex, a leading manufacturer and
designer of high-performance, multi-room video distribution equipment for home
automation/home entertainment. Multiplex had net sales of approximately
$10,000,000 for the year ended December 31, 1998.
As the Company integrates the 1998 and 1999 acquisitions into its businesses, it
expects to achieve significant synergies, cost savings and reductions during
1999, partially offset by certain costs and expenses. The Company estimates that
it will record additional liabilities associated with the Company's integration
plans for the 1998 acquisitions in the range of $6,000,000 and $12,000,000
relating principally to additional employee terminations and other exit costs of
certain products and the consolidation of certain functions and operations at
the acquired businesses. The total expenditures associated with exit costs
related to the integration effort at July 3, 1999 are estimated to range between
approximately $11,000,000 and $17,000,000 for acquisitions prior to 1999 and are
expected to be funded from the Company's 1999 operating cash flow. If
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
significant difficulty is encountered during the integration process, or if such
synergies and cost savings are not realized, the results of operations, cash
flow and financial condition of the Company likely will be adversely affected.
There can be no assurance that the Company will be able to successfully manage
and integrate the 1998 and 1999 acquisitions. (See Note D, I, J, K and M of the
Notes to the Unaudited Condensed Consolidated Financial Statements included
elsewhere herein.)
Unrestricted cash and cash equivalents decreased from approximately $87,876,000
at December 31, 1998 to approximately $72,143,000 at July 3, 1999. Marketable
securities available for sale decreased from approximately $121,757,000 at
December 31, 1998 to approximately $30,803,000 at July 3, 1999. The Company's
investment in marketable securities at July 3, 1999 consisted primarily of
certificates of deposit, commercial paper and bank issued money market
instruments. At July 3, 1999, approximately $9,970,000 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
condensed consolidated balance sheet.
Capital expenditures were approximately $41,400,000 for the year 1998,
approximately $25,300,000 in the first six months of 1999 and are expected to
range between approximately $45,000,000 and $50,000,000 for all of 1999.
The Company's Board of Directors has authorized a number of programs to purchase
shares of the Company's Common and Special Common Stock. The most recent of
these programs was announced on May 20, 1999, and allows the Company to purchase
up to 500,000 shares of the Company's Common and Special Common Stock in open
market or negotiated transactions, subject to market conditions, cash
availability and provisions of the Company's outstanding debt instruments. As of
August 6, 1999, the Company has purchased approximately 21,100 shares of its
Common and Special Common Stock under this program for approximately $691,800
and accounted for such share purchases as Treasury Stock.
At August 6, 1999, approximately $80,584,000 was available for the payment of
cash dividends, stock purchases or other restricted payments as defined under
the terms of the Company's most restrictive Indenture. (See Note F of the Notes
to the Unaudited Condensed Consolidated Financial Statements included elsewhere
herein.)
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
The Company's working capital and current ratio decreased from approximately
$337,207,000 and 2.0:1, respectively, to approximately $321,361,000 and 1.8:1,
respectively, between December 31, 1998 and July 3, 1999, principally as a
result of payments related to acquisitions partially offset by working capital
acquired from such acquisitions and net of the factors described below.
Accounts receivable increased approximately $85,961,000 or approximately 41.9%,
between December 31, 1998 and July 3, 1999, while net sales increased
approximately $106,053,000 or approximately 24.2% in the second quarter of 1999
as compared to the fourth quarter of 1998. These increases are a result of
acquisitions, which contributed approximately $44,000,000 to net sales and
approximately $29,300,000 to accounts receivable in the first six months of
1999. The rate of change in accounts receivable in certain periods may be
different than the rate of change in sales in such periods principally due to
the timing of net sales. Increases or decreases in net sales near the end of any
period generally result in significant changes in the amount of accounts
receivable on the date of the balance sheet at the end of such period, as was
the situation on July 3, 1999 as compared to December 31, 1998. The Company has
not experienced any significant overall changes in credit terms, collection
efforts, credit utilization or delinquency in accounts receivable in 1999.
Inventories increased approximately $48,907,000 or approximately 30.1%, between
December 31, 1998 and July 3, 1999. Acquisitions contributed approximately
$19,700,000 to the increase in inventory for the first six months of 1999.
Accounts payable increased approximately $46,769,000 or approximately 38.9%,
between December 31, 1998 and July 3, 1999. Acquisitions contributed
approximately $5,900,000 to the increase in accounts payable.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Unrestricted cash and cash equivalents decreased approximately $15,733,000 from
December 31, 1998 to July 3, 1999, principally as a result of the following:
Condensed
Consolidated
Cash Flows
----------
Operating Activities--
Cash flow from operations, net $ 66,944,000
Increase in accounts receivable, net (63,527,000)
Increase in inventories (29,060,000)
Decrease in prepaids and
other current assets 2,973,000
Increase in accounts payable 43,503,000
Decrease in accrued expenses and taxes (5,882,000)
Investing Activities---
Net cash paid for businesses acquired (86,571,000)
Proceeds from the sale of marketable
securities, net 91,228,000
Capital expenditures (25,349,000)
Decrease in restricted cash and investments 3,798,000
Financing Activities---
Payment of borrowings, net (2,734,000)
Purchase of Nortek Common and Special
Common Stock (3,770,000)
Other, net (7,286,000)
----------
$(15,733,000)
============
The impact of changes in foreign currency exchange rates on cash was not
material and has been included in other, net.
The Company's debt-to-equity ratio decreased from approximately 4.7:1 at
December 31, 1998 to 4.2:1 at July 3, 1999, primarily as a result of the
increase in equity due to net earnings for the first six months of 1999, the
issuance of Common Stock as partial consideration for an acquisition and the net
payment of borrowings, partially offset by the effect of the purchase of Nortek
Common and Special Common Stock and changes in currency translation. (See the
Consolidated Statement of Stockholders' Investment included elsewhere herein.)
At December 31, 1998, the Company's wholly owned subsidiary, Ply Gem, had a net
operating loss carry forward of approximately $61,300,000 that expires in 2011
and is subject to certain limitations imposed by the Internal Revenue Code. The
Company expects to utilize approximately $40,000,000 of this net operating loss
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
in its 1999 federal tax return, which will result in lower federal tax payments
of approximately $14,000,000 for 1999.
Inflation, Trends and General Considerations
- --------------------------------------------
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and the possible dispositions of certain of its
businesses on an ongoing basis and at any given time may be engaged in
discussions or negotiations with respect to possible acquisitions or
dispositions.
The Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth quarters. Since a high
percentage of the Company's manufacturing overhead and operating expenses are
relatively fixed throughout the year, operating income and net earnings tend to
be lower in quarters with lower sales levels. The businesses acquired in 1997,
1998 and 1999 included in the Windows, Doors and Siding Segment have, in the
past, been more seasonal in nature than the Company's businesses owned prior to
these acquisitions. In addition, the demand for cash to fund the working capital
of the Company's subsidiaries is greater from late in the first quarter until
early in the fourth quarter.
Market Risk
- -----------
As discussed more specifically below, the Company is exposed to market risks
related to changes in interest rates, foreign currencies and commodity pricing.
The Company uses derivative financial instruments on a limited basis to hedge
economic exposures. The Company does not enter into derivative financial
instruments or other financial instruments for trading purposes.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
There have been no significant changes in market risk from the December 31, 1998
disclosures included in the Company's Annual Report on Form 10-K.
A. Interest Rate Risk
- -----------------------
The Company is exposed to market risk from changes in interest rates primarily
through its investing and borrowing activities. In addition, the Company's
ability to finance future acquisition transactions may be impacted if the
Company is unable to obtain appropriate financing at acceptable interest rates.
The Company's strategy for managing interest rate exposure is to invest in
short-term, highly liquid investments and marketable securities. Short-term
investments primarily consist of money market accounts, certificates of deposit
and, corporate commercial paper with original maturities of 90 days or less.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. In addition, the
Company has hedged its exposure on a substantial portion of its variable rate
debt by entering into interest rate swap agreements to lock in a fixed rate.
B. Foreign Currency Risk
- ------------------------
The Company's results of operations are affected by fluctuations in the value of
the U.S. dollar as compared to the value of currencies in foreign markets
primarily related to changes in the Italian Lira and the Canadian Dollar. For
the first six months of 1999, the net impact of foreign currency changes was not
material to the Company's financial condition or results of operations. The
Company manages its exposure to foreign currency exchange risk principally by
trying to minimize the Company's net investment in foreign assets through the
use of strategic short and long-term borrowings at the foreign subsidiary level.
The Company generally does not enter into derivative financial instruments to
manage foreign currency exposure. At July 3, 1999, the notional amounts of
outstanding foreign currency hedging contracts, all of which expire in 1999,
were not material. The Company does not expect the settlement of such contracts
to have a material impact on financial condition or results of operations in
fiscal 1999.
The Company's operations in Europe are not significant and, therefore, the
Company does not expect to be materially impacted by the European single
currency, the Euro.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
C. Commodity Pricing Risk
- -------------------------
The Company is subject to significant market risk with respect to the pricing of
its principal raw materials, which include, among others, steel, copper,
packaging material, plastics, resins, glass, wood and aluminum. If prices of
these raw materials were to increase dramatically, the Company may not be able
to pass such increases on to its customers and, as a result, gross margins could
decline significantly. The Company manages its exposure to commodity pricing
risk by continuing to diversify its product mix, strategic buying programs and
vendor partnering.
The Company generally does not enter into derivative financial instruments to
manage commodity-pricing exposure. At July 3, 1999, the Company did not have any
outstanding commodity forward contracts.
Year 2000 Disclosure
- --------------------
The Year 2000 ("Y2K") issue refers to and arises from deficient computer
programs and related products, such as embedded chips, which do not properly
distinguish between a year that begins with "20" instead of "19" beginning on
January 1, 2000. If not corrected, many businesses and processes could fail or
create erroneous results. The extent of the potential impact of the Y2K problem
is not yet known, and if not timely corrected, it could affect the global
economy. As required by recent guidance from the Securities and Exchange
Commission ("SEC") applicable to all public companies, the following disclosure
provides more detail regarding the Company's Y2K compliance than previous
reports filed by the Company.
A. The Company's Readiness:
- ---------------------------
To manage its Y2K program, the Company established a corporate-wide initiative
and has divided its efforts into five areas: awareness (communication to
employees, vendors and suppliers of the Y2K issue), assessment (a complete
inventory of all aspects of the business that might be affected),
remediation/validation (develop plans to correct all issues identified from the
assessment stage), implementation (corrective measures taken to solve the Y2K
issues identified) and contingency (alternative actions developed in the event
that all corrective measures are not implemented by Y2K). Further, the Company
has identified three key areas of concentration: information technology ("IT")
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
systems, non-IT systems and third parties (suppliers and customers). The
Company's subsidiaries are in various stages of completion of this initiative,
including the implementation and contingency stages, for the Y2K issue. Certain
of the Company's subsidiaries are simultaneously working on the implementation
and contingency stages of this initiative. During the third fiscal quarter of
1999, the Company's subsidiaries expect to make significant progress in the
implementation and contingency stages. Overall the Company believes that it is
in the implementation stage and is making progress in the contingency stage of
addressing the Y2K issue. Although the Company believes that all IT and non-IT
systems material to the Company's business will be Y2K compliant on or before
December 31, 1999, it cannot predict the outcome or the success of its Y2K
program, or that third party systems are or will be Y2K compliant, or that the
costs required to address the Y2K initiative, or that the impact of a failure to
achieve substantial Y2K compliance, will not have a material adverse effect on
the Company's business, financial condition or results of operations.
1. IT systems: The Company has conducted a comprehensive review of its
computer systems to identify those that could be affected by the Y2K issue.
The Company's operating systems and database systems are not all Y2K
compliant. The Company presently believes that with minor modifications
(conversion and testing in progress) to existing software and replacement
of others, the Y2K problem will not pose significant operational problems
for the Company's computer systems as so modified.
2. Non-IT systems: Non-IT systems are those that typically include "embedded"
technology such as microcontrollers and chips. The Company has evaluated
the effect of the Y2K problem on all non-IT systems including all
telecommunications equipment, shop-floor controls, alarm systems and any
other equipment that can potentially use microcontrollers, chips or other
systems affected by the Y2K problem.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
3. Third parties: Due to the pervasive use of computers by the Company's
suppliers, customers, financial institutions, and other third parties, the
Y2K problem could have a material impact on the Company if not timely
addressed by such third parties. To assess third party readiness, the
Company is surveying its principal suppliers and financial institutions and
receiving responses that indicate that such parties are in the process of
adequately addressing the problem. In cases where key suppliers have not
responded or are not adequately addressing the issue, the Company will
determine what contingency plans will be necessary to protect the Company's
interests. While the Company has not surveyed all its customers, it has
received surveys from many of its principal customers that indicate that
they are also addressing the problem. See the discussion under Contingency
Plan/Risks.
The Company operates in a decentralized environment and major computer systems
are, therefore, in various states of readiness. The Company has 25 businesses
with various IT systems that support 100% of the Company's anticipated net sales
for 1999 including the five businesses acquired in 1999 and one business started
in 1999. One business acquired in 1999 has not been fully evaluated for its
state of readiness. Until this review is completed, the Company is unable to
make an assessment of the Y2K readiness of this acquisition. The anticipated
1999 sales for this acquisition represent less than 1% of the Company's total.
The Company estimates that the remediation effort for IT systems Y2K issues of
16 business units representing approximately 67% of net sales for 1999 are
approximately 80-95% complete. The Company estimates that the remediation effort
for the IT systems Y2K issues of eight business units representing approximately
32% of net sales for 1999 are approximately 60-75% complete.
Substantially all of the non-IT systems, including telephone systems and office
equipment, have been tested. Those found not to be Y2K compliant are in the
process of being replaced or repaired. Machinery and equipment testing and
remediation are in process. Third party inquiry and contingency efforts are also
in progress. Combined, the Company estimates the non-IT systems efforts are
approximately 75% complete overall, while third party evaluations, including
contingency planning, are 50% complete overall.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
B. Cost:
- --------
The Company's estimate for remediation directly related to correcting Y2K issues
is approximately $6,500,000, including businesses acquired in 1999. The total
estimated expenditures of approximately $6,500,000 consist of approximately
$2,000,000 of IT computer hardware equipment costs, approximately $3,000,000 of
IT software and non-IT computer hardware expenditures and approximately
$1,500,000 of other non-IT expenditures. The Company has spent approximately
$4,700,000 through July 3, 1999. All of the Company's Y2K compliance
expenditures have been or are expected to be funded from the Company's operating
cash flow.
The Company's Y2K compliance budget does not include significant amounts for
hardware replacement because the Company has historically employed a strategy to
continually upgrade its computer systems. Consequently, the Company's Y2K
compliance budget has not required the diversion of funds from or the
postponement of the implementation of other planned IT projects.
Actual costs to be incurred by the Company may deviate from the estimates above,
as a result of dependence on a number of factors which cannot be accurately
predicted, including, among others, the extent and difficulty of the remaining
remediation and other work to be done, the availability and cost of consultants,
and the extent of testing required to demonstrate Y2K compliance.
C. Contingency Plans/Risks:
- ---------------------------
The Company is in the process of preparing appropriate contingency plans for
significant internal or external exposures that are identified. While the
Company is not presently aware of any such significant exposure, there can be no
guarantee that the systems of third parties on which the Company relies will be
converted in a timely manner, or that a failure to properly convert by another
company would not have a material adverse effect on the Company. The Company's
contingency plans for IT systems are being evaluated and addressed on an
individual subsidiary by subsidiary basis. As all testing of all systems is not
expected to be completed until early in the fourth quarter, not all contingency
plans have been completed. In planning for issues not resolved or contemplated
for IT systems, the Company plans to allocate internal resources and may retain
dedicated consultants and vendor representatives to be available to take
corrective action, if necessary. However, the Company will adjust existing and
adopt additional plans if situations arise
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
requiring modifications to existing contingency plans or new contingency plans,
as required.
The Company's contingency plans for non-IT systems are also being continuously
evaluated and have also not been completed. The Company's subsidiaries do,
however, have various business interruption contingency plans in place. These
plans are in the process of being evaluated for Y2K scenarios and will be
adjusted as appropriate. As discussed below, the Company will develop, if
necessary, appropriate contingency plans to address additional issues the
Company discovers will have an adverse impact on the Company's ability to
conduct business.
Based on current information, the Company believes that the Y2K problem will not
have a material adverse effect on the Company, its business or its financial
condition as a result of those issues directly under its control. However, there
can be no assurance that Y2K remediation by the Company or third parties will be
properly and timely completed, and failure to do so could have a material
adverse effect on the Company, its business and its financial condition. The
Company believes that the greatest risk presented by the Y2K problem is from
third parties, such as suppliers, financial institutions, utility providers and
customers, among others, who may not have adequately addressed the problem. A
failure of any such third party's computer or other applicable systems in
sufficient magnitude could materially and adversely affect the Company. The
Company is not presently able to quantify this risk especially with respect to
utility providers.
The Company does not consider that catastrophic events resulting in massive and
prolonged disruption of service such as a world-wide disruption of the financial
system, failure of government, both domestic (local, state and federal) and
foreign or a national disruption of electrical power are a reasonable most
likely worst case Y2K scenario. Accordingly, the Company will not develop any
plans for such catastrophic events. The Company recognizes the risks in its
ability to conduct business if other key suppliers in utilities, communications,
transportation, banking and government, both domestic (local, state and federal)
and foreign, are not Y2K ready. The Company is monitoring news and progress
reports pertaining to those critical services to determine the effect on the
Company's ability to conduct business as a result of Y2K issues on the economy
if those and other key suppliers in utilities, communications, transportation,
banking and government, both domestic (local, state and federal) and foreign,
cease to function.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
It is the Company's opinion that the most likely worst case scenario it faces
for which it can make reasonable contingency plans are in two areas. One area of
concern is the temporary loss of utilities, specifically power in certain areas
of the country. The other area is the inability of certain key suppliers of
materials to deliver goods when a subsidiary needs them. Each of the Company's
subsidiaries have or are making contingency plans to address both situations on
an individual basis.
Contingency plans for the temporary loss of power in a specific area are being
addressed by each facility within each subsidiary. In some cases this type of
disruption is expected to have a negligible impact as a specific subsidiary or
facility may have plant shutdowns planned during this period or because this
period has traditionally been a time of low customer shipments. In other cases
where the business is not seasonal, the use of generators is being investigated
to power specific portions of specific facilities where available and reasonably
priced. Increased inventory levels for the fourth quarter of 1999 are being
investigated. In certain cases where generator usage is not a feasible
alternative, production and shipments to customers may be scheduled during a
period other than early January 2000 when a temporary loss of power might occur.
All subsidiaries are planning to have spot generators on-site to power specific
areas of each building including all computer systems. In many cases, a central
computer system handles computer processing and LAN systems of the remote
facilities of the subsidiary. For those subsidiaries with facilities in
geographical areas where cold weather dominates the early part of each year, the
risk of freezing temperatures is a concern. In those cases, spot-heating
equipment is planned to maintain Company facilities at a temperature above which
building damage can occur.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
Another major risk that the Company has identified as most likely is the loss of
a critical supplier of materials. This risk has the potential to disrupt the
Company's subsidiaries ability to deliver goods to its customers. Each
subsidiary is performing an ongoing assessment of its critical suppliers to
determine this risk. Each subsidiary's contingency plan will address each
supplier identified as being critical and at risk. In some cases suppliers are
being asked to stockpile a supply of materials specifically for the subsidiary.
In other cases alternative suppliers are being evaluated and qualified. In some
cases, as a last resort, a subsidiary will stockpile materials if the supplier
is unable to perform that service for the subsidiary. In all cases, the working
capital needs and requirements of the Company are being considered as part of
the subsidiary's contingency plan. The Company's policy is not to increase
working capital requirements as part of a particular contingency plan except
where no other alternative contingency plan is expected to work. Contingency
plans are continually evaluated and adjusted or new plans made as each
individual situation changes.
Forward-Looking Statements
- --------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this discussion
and throughout this document, words, such as "intends," "plans," "estimates,"
"believes," "anticipates" and "expects" or similar expressions are intended to
identify forward-looking statements. These statements are based on the Company's
current plans and expectations and involve risks and uncertainties, over which
the Company has no control, that could cause actual future activities and
results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and operating results to differ include the availability and cost of
certain raw materials costs, (including, among others, steel, copper, packaging
materials, plastics resins, glass, wood and aluminum) and purchased components,
the level of domestic and foreign construction and remodeling activity affecting
residential and commercial markets, interest rates, employment, inflation, Y2K
readiness, currency translation, consumer spending levels, operating in
international economies, the rate of sales growth, price, and product and
warranty liability claims. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 1999
AND THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
(Continued)
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by these cautionary statements.
Readers are also urged to carefully review and consider the various disclosures
made by the Company, in this document, as well as the Company's periodic reports
on Forms 10-K, 10-Q and 8-K, filed with the SEC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K or Form 8-K/A.
The following reports on Form 8-K or Form 8-K/A were filed by
the registrant during the period:
April 8, 1999, Item 5, Other
April 23, 1999, Item 5, Other
April 26, 1999, Item 5, Other
June 16, 1999, Item 7, Financial
Statements, Pro Forma Financial
Information and Exhibits
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTEK, INC.
(Registrant)
/s/ Almon C. Hall
-----------------
Almon C. Hall, Vice President and
Controller and Chief Accounting Officer
August 17,1999
(Date)
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