FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ______________________
Commission File No. 1-6112
- --------------------------------------------------------------------------------
NORTEK, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 05-0314991
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 KENNEDY PLAZA, PROVIDENCE, RI 02903-2360
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(401) 751-1600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares of Common Stock outstanding as of November 5, 1999 was
11,039,190. The number of shares of Special Common Stock outstanding as of
November 5, 1999 was 552,900.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
OCTOBER 2, DEC. 31,
1999 1998
---------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Unrestricted:
Cash and cash equivalents $ 71,998 $ 87,876
Marketable securities available for sale 24,985 121,757
Restricted:
Cash and cash equivalents 2,631 ---
Investments and marketable securities
at cost, which approximates market 20,397 13,818
Accounts receivable, less allowances
of $12,350 and $10,657 290,726 205,359
Inventories:
Raw materials 95,469 69,247
Work in process 18,077 13,010
Finished goods 95,038 80,450
---------- ----------
208,584 162,707
---------- ----------
Prepaid expenses 12,581 10,938
Other current assets 12,490 15,513
Prepaid income taxes 68,145 54,163
---------- ----------
TOTAL CURRENT ASSETS 712,537 672,131
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 16,373 12,628
Buildings and improvements 116,296 102,455
Machinery and equipment 342,901 294,551
---------- ----------
475,570 409,634
Less accumulated depreciation 153,908 130,010
---------- ----------
TOTAL PROPERTY AND EQUIPMENT, NET 321,662 279,624
---------- ----------
OTHER ASSETS:
Goodwill, less accumulated amortization
of $52,867 and $41,204 599,315 598,823
Intangible assets, net 106,429 73,441
Deferred debt expense 22,935 24,845
Other 45,619 41,129
---------- ----------
774,298 738,238
---------- ----------
$1,808,497 $1,689,993
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
1
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
(Continued)
OCTOBER 2, DEC. 31,
1999 1998
---------- --------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable and other short-term
obligations $ 10,298 $ 10,962
Current maturities of long-term debt 5,725 6,776
Accounts payable 163,502 120,101
Accrued expenses and taxes, net 201,129 197,085
--------- ----------
TOTAL CURRENT LIABILITIES 380,654 334,924
--------- ----------
OTHER LIABILITIES:
Deferred income taxes 53,915 26,040
Other 91,656 104,306
--------- ----------
145,571 130,346
--------- ----------
NOTES, MORTGAGE NOTES AND OBLIGATIONS
PAYABLE, LESS CURRENT MATURITIES 1,021,392 1,007,113
--------- ----------
STOCKHOLDERS' INVESTMENT:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,734,777 and
18,427,595 shares issued 18,735 18,428
Special common stock, $1 par value;
authorized 5,000,000 shares; 843,451
and 854,935 shares issued 843 855
Additional paid-in capital 208,859 201,626
Retained earnings 137,866 93,966
Accumulated other comprehensive loss (12,606) (11,596)
Less --treasury common stock at cost,
7,520,817 and 7,290,335 shares (90,750) (83,711)
--treasury special common stock
at cost, 290,021 and
286,009 Shares (2,067) (1,958)
---------- ----------
TOTAL STOCKHOLDERS' INVESTMENT 260,880 217,610
---------- ----------
$1,808,497 $1,689,993
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
2
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
For The
Three Months Ended
October 2, October 3,
1999 1998
---------- ---------
(Unaudited)
Net sales $553,493 $458,193
Costs and expenses:
Cost of products sold 396,014 331,192
Selling, general and
administrative expense 93,323 78,723
Amortization of goodwill and
intangible assets 5,074 3,991
-------- --------
494,411 413,906
-------- --------
Operating earnings 59,082 44,287
Interest expense (24,225) (22,928)
Investment income 1,643 3,141
-------- --------
Earnings from continuing
operations before provision
for income taxes 36,500 24,500
Provision for income taxes 15,900 11,200
-------- --------
Earnings from continuing operations
before extraordinary loss 20,600 13,300
Earnings from discontinued operations --- 600
Extraordinary loss from debt retirements --- (100)
-------- --------
Net earnings $ 20,600 $ 13,800
======== ========
Net Earnings (Loss) Per Share:
Earnings from continuing operations
before extraordinary loss:
Basic $1.74 $1.13
Diluted $1.70 $1.11
Earnings from discontinued operations:
Basic --- $ .05
Diluted --- $ .05
Extraordinary loss from debt retirements:
Basic --- $(.01)
----- -----
Diluted --- $(.01)
----- -----
Net Earnings:
Basic $1.74 $1.17
===== =====
Diluted $1.70 $1.15
===== =====
Weighted Average Number of Shares:
Basic 11,808 11,721
====== ======
Diluted 12,104 11,951
====== ======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
For The
Nine Months Ended
October 2, October 3,
1999 1998
---------- ---------
(Unaudited)
Net sales $1,504,281 $1,300,308
Costs and Expense:
Cost of products sold 1,077,901 959,018
Selling, general and
administrative expense 266,548 234,222
Amortization of goodwill and
intangible assets 14,913 9,934
--------- ---------
1,359,362 1,203,174
--------- ---------
Operating earnings 144,919 97,134
Interest expense (72,564) (62,126)
Investment income 6,145 7,492
--------- ---------
Earnings from continuing
operations before provision
for income taxes 78,500 42,500
Provision for income taxes 34,600 19,400
--------- ---------
Earnings from continuing operations
before extraordinary loss 43,900 23,100
Earnings from discontinued operations --- 600
Extraordinary loss from debt retirements --- (100)
--------- ---------
Net Earning $ 43,900 $ 23,600
========= =========
Net Earnings (Loss) Per Share:
Earnings from continuing operations
before extraordinary loss:
Basic $3.72 $2.17
Diluted $3.65 $2.13
Earnings from discontinued operations:
Basic --- $ .05
Diluted --- $ .05
Extraordinary loss from debt retirements:
Basic --- $(.01)
--- -----
Diluted --- $(.01)
--- -----
Net Earnings:
Basic $3.72 $2.21
===== =====
Diluted $3.65 $2.17
===== =====
Weighted Average Number of Shares:
Basic 11,802 10,660
====== ======
Diluted 12,027 10,858
====== ======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
For The
Nine Months Ended
October 2, October 3,
1999 1998
---------- ----------
(Unaudited)
Cash flows from operating activities:
Earnings from continuing operations $43,900 $ 23,100
Earnings from discontinued operations --- 600
Extraordinary loss from debt retirements --- (100)
------- ---------
Net earnings 43,900 23,600
------- ---------
Adjustments to reconcile net earnings to cash:
Depreciation and amortization expense 40,133 31,043
Non-cash interest expense 2,828 2,497
Loss on sale of a discontinued operation
before income taxes --- 2,500
Loss on debt retirements before income taxes --- 150
Deferred federal income tax provision 18,000 7,300
Deferred federal income tax credit from
discontinued operations --- (2,300)
Changes in certain assets and liabilities, net
of effects from acquisitions and dispositions:
Accounts receivable, net (54,968) (36,315)
Prepaid and other current assets 2,276 (4,492)
Inventories (23,480) (12,269)
Net assets of discontinued operations --- (6,659)
Accounts payable 35,385 24,346
Accrued expenses and taxes (13,092) (9,536)
Long-term assets, liabilities and other, net (453) (3,150)
-------- ---------
Total adjustments to net earnings 6,629 (6,885)
-------- ---------
Net cash provided by operating activities 50,529 16,715
-------- ---------
Cash flows from investing activities:
Capital expenditures (34,400) (24,185)
Net cash paid for businesses acquired (113,018) (242,500)
Purchase of investments and marketable
securities (79,295) (100,512)
Proceeds from the sale of investments
and marketable securities 176,339 36,123
Net proceeds from businesses sold or
discontinued --- 68,947
Change in restricted cash and investments (3,968) ---
Other, net (6,863) (7,088)
-------- ---------
Net cash used in investing activities $ (61,205) $(269,215)
--------- ---------
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(continued)
For The
Nine Months Ended
October 2, October 3,
1999 1998
---------- ----------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of notes, net $ --- $203,492
Purchase of notes --- (10,511)
Net increase (decrease) in borrowings 1,395 (26,141)
Net proceeds from the sale of Nortek
Common Stock --- 64,190
Purchase of Nortek Common and Special
Common Stock (6,982) (6,760)
Other, net 385 1,589
------ -------
Net cash (used in)provided by financing
activities (5,202) 225,859
------- -------
Net decrease in unrestricted
cash and cash equivalents (15,878) (26,641)
Unrestricted cash and cash equivalents
at the beginning of the period 87,876 125,842
------- -------
Unrestricted cash and cash equivalents
at the end of the period $71,998 $ 99,201
======= ========
Interest paid $90,380 $ 76,880
======= ========
Income taxes paid, net $ 8,993 $ 2,617
======= ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income (loss) Income
------ ------ ------- -------- -------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 4, 1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $ (6,903) $ ---
Net earnings --- --- --- 13,800 --- --- 13,800
Other comprehensive
income:
Currency translation --- --- --- --- --- 416 416
adjustment
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 474 474
-------
Comprehensive income $14,690
=======
2,675 shares of
special common stock
converted into
2,675 shares of
common stock 3 (3) --- --- --- ---
4,947 shares of
common stock
issued upon exercise
of stock options 5 --- (5) --- --- ---
15,620 shares of
treasury stock
acquired --- --- --- --- (186) ---
Other --- --- 1,948 --- --- ---
------- ----- -------- ------- -------- -------
Balance, October 3,1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013)
======= ===== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
7
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income (loss) Income
------ ------ ------- -------- -------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 3, 1999 $18,692 $846 $207,857 $117,266 $(89,439) $(13,508) $ ---
Net earnings --- --- --- 20,600 --- --- 20,600
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- 952 952
Unrealized decrease in
the value of market-
able securities --- --- --- --- --- (50) (50)
-------
Comprehensive income $21,502
=======
2,309 shares of
special common stock
converted into 2,309
shares of common stock 3 (3) --- --- --- ---
40,083 shares of common
stock issued upon
exercise of stock
options 40 --- 913 --- --- ---
94,244 shares of
treasury stock
acquired --- --- --- --- (3,378) ---
Other --- --- 89 --- --- ---
------- ---- -------- -------- -------- --------
Balance, October 2, 1999 $18,735 $843 $208,859 $137,866 $(92,817) $(12,606)
======= ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
8
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income (loss) Income
------ ------ ------- -------- -------- ------------- -------------
(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 --- --- --- 23,600 --- --- 23,600
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- (1,181) (1,181)
Unrealized increase
in the value of
marketable securities --- --- --- --- --- 595 595
Minimum pension liability
Net of $65 tax benefit --- --- --- --- --- (100) (100)
-------
Comprehensive income $22,914
=======
Sale of 2,182,500 shares
of common stock 2,182 --- 62,207 --- --- ---
10,831 shares of
special common stock
converted into
10,831 shares of
common stock 11 (11) --- --- --- ---
172,875 shares of
common stock and
100,991 shares of
special common stock
issued upon exercise
of stock options 173 101 3,277 --- --- ---
221,043 shares of
Treasury stock acquired --- --- --- --- (6,760) ---
------- ------ -------- ------- -------- -------
Balance, October 3, 1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013)
======= ====== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
9
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income (loss) Income
------ ------ ------- -------- -------- ------------- -------------
(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 --- --- --- 43,900 --- --- 43,900
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- (1,197) (1,197)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- 187 187
-------
Comprehensive income $42,890
=======
11,484 shares of
special common stock
converted into 11,484
shares of common stock 12 (12) --- --- --- ---
60,698 shares of common
stock issued upon
exercise of
stock options 60 --- 1,064 --- --- ---
234,494 shares of
treasury stock
acquired --- --- --- --- (7,148) ---
235,000 shares of common
stock issued as
partial consideration
for an acquisition 235 --- 6,080 --- --- ---
Other --- --- 89 --- --- ---
------- --- -------- -------- -------- --------
BALANCE, OCTOBER 2, 1999 $18,735 $843 $208,859 $137,866 $(92,817) $(12,606)
======= ==== ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
</TABLE>
10
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(A) The unaudited condensed consolidated financial statements (the
"Unaudited Financial Statements") presented have been prepared by
Nortek, Inc. and include the accounts of Nortek, Inc., and all of its
significant wholly owned subsidiaries (the "Company") after elimination
of intercompany accounts and transactions, without audit and, in the
opinion of management, reflect all adjustments of a normal recurring
nature necessary for a fair statement of the interim periods presented.
Although certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, the Company believes that the
disclosures included are adequate to make the information presented not
misleading. Certain amounts in the Unaudited Financial Statements for
prior periods have been reclassified to conform to the October 2, 1999
presentation. It is suggested that these Unaudited Financial Statements
be read in conjunction with the financial statements and the notes
included in the Company's latest Annual Report on Form 10-K as filed
with the Securities and Exchange Commission.
(B) During the second quarter of 1998, the Company sold, in a public offering,
2,182,500 shares of its common stock for net proceeds of approximately
$64,190,000 (the "Common Stock Offering").
(C) Acquisitions are accounted for as purchases and, accordingly, have been
included in the Company's consolidated results of operations since the
acquisition date. Purchase price allocations are subject to refinement
until all pertinent information regarding the acquisitions is obtained.
(D) On July 31, 1998, the Company, through a wholly owned subsidiary,
purchased all of the issued and outstanding capital stock of NuTone Inc.
("NuTone"), a wholly owned subsidiary of Williams plc ("Williams") for
an aggregate purchase price of $242,500,000 in cash plus approximately
$5,500,000 in expenses and fees. The purchase price was funded through
the use of the net proceeds from the sale of $210,000,000 principal
amount of 8 7/8% Senior Notes due August 1, 2008 (the "8 7/8% Notes") at
a slight discount, which occurred on July 31, 1998, together with
approximately $44,800,000 of the cash proceeds received from the Common
Stock Offering.
(E) The following presents the approximate unaudited Pro Forma net sales,
depreciation and amortization expense (other than amortization of deferred
debt expense and debt discount), operating earnings, earnings from
continuing operations and diluted earnings per share from continuing
operations of the Company for the three months and nine months ended
11
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
October 3, 1998 and the year ended December 31, 1998 and gives pro forma
effect to the Common Stock Offering, the sale of the 8 7/8% Notes and the
acquisition of NuTone on July 31, 1998, and reflects the estimated cost
reductions directly attributable to the NuTone acquisition as described
below as if such transactions had occurred on January 1, 1998. The Pro
Forma results for the periods presented below include the actual results of
NuTone since July 31, 1998 in accordance with the purchase method of
accounting for an acquisition. Pro Forma operating results do not give pro
forma effect to dispositions of businesses that occurred in 1998, the
acquisition of Napco, Inc. which occurred on October 9, 1998 or
acquisitions which occurred in 1999. (See Notes I, J, K and L).
<TABLE>
<CAPTION>
Three Months Nine Months Year
Ended Ended Ended
October 3, October 3, December 31,
1998 1998 1998
---------- ---------- ------------
(In thousands except per share amounts)
(Unaudited)
<S> <C> <C> <C>
Pro Forma:
Net sales $473,600 $1,411,000 $1,849,000
Depreciation and
amortization expense 11,900 36,200 47,400
Operating earnings 45,800 106,600 142,500
Earnings from continuing
operations 12,900 21,400 31,400
Diluted earnings per
share from continuing
operations $1.08 $1.80 $2.63
</TABLE>
At the date of the NuTone acquisition, the Company achieved cost
reductions directly attributable to the acquisition from the elimination
of fees and charges paid by NuTone to Williams and related entities. The
unaudited Pro Forma operating earnings have been increased by
approximately $354,000 for the nine months ended October 3, 1998 and the
year ended December 31, 1998 and decreased by approximately $30,000 for
the three months ended October 3, 1998 to reflect the elimination of such
fees. Subsequent to the NuTone acquisition, the Company expects to realize
approximately $15,000,000 in unaudited estimated annual cost reductions
("NuTone Cost Reductions") that can be achieved as a
12
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
result of integrating NuTone into the Company's operations. Pro Forma
earnings have not been increased for the NuTone Cost Reductions for the
periods presented, except for NuTone Cost Reductions actually achieved
since the date of acquisition. The NuTone Cost Reductions are estimates
and actual savings achieved could differ materially.
In computing the Pro Forma earnings, earnings have been reduced by the net
interest income on the aggregate cash portion of the purchase price of the
NuTone acquisition at the historical rate earned by the Company and
interest expense on indebtedness incurred in connection with the
acquisition of NuTone. Earnings have also been reduced by amortization of
goodwill and intangible assets and reflect net adjustments to depreciation
expense as a result of an increase in the estimated fair market value of
property and equipment and changes in depreciable lives. Interest expense
was included on the 8 7/8% Notes at the applicable coupon rate plus
amortization of deferred debt expense and debt discount, net of tax
effect. The Pro Forma information presented does not purport to be
indicative of the results which would have been reported if these
transactions had occurred on January 1, 1998, or which may be reported in
the future.
(F) The Company's Board of Directors has authorized a number of programs to
purchase shares of the Company's Common and Special Common Stock. The
most recent of these programs was announced on May 20, 1999, and allows
the Company to purchase up to 500,000 shares of the Company's Common and
Special Common Stock in open market or negotiated transactions, subject
to market conditions, cash availability and provisions of the Company's
outstanding debt instruments. As of November 5, 1999, the Company has
purchased approximately 280,600 shares of its Common and Special Common
Stock under this program for approximately $8,600,000 and accounted for
such share purchases as Treasury Stock.
At November 5, 1999, approximately $87,000,000 was available for the
payment of cash dividends, stock purchases or other restricted payments as
defined under the terms of the Company's most restrictive Indenture.
(G) Basic earnings per share amounts have been computed using the weighted
average number of common and common equivalent shares outstanding during
each period. Special Common Stock is treated as the equivalent of Common
Stock in determining
13
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
earnings per share results. Diluted earnings per share amounts have been
computed using the weighted average number of common and common equivalent
shares and the dilutive potential common and special common shares
outstanding during each period.
A reconciliation between basic and diluted earnings per share from
continuing operations is as follows:
<TABLE>
<CAPTION>
Three Nine
Months ended Months ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
------- ------- ------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Earnings from continuing
operations $20,600 $13,300 $43,900 $23,100
Basic EPS:
Basic common shares 11,808 11,721 11,802 10,660
====== ====== ====== ======
Basic EPS $1.74 $1.13 $3.72 $2.17
===== ===== ===== =====
Diluted EPS:
Basic common shares 11,808 11,721 11,802 10,660
Plus: Impact of stock
options 296 230 225 198
------ ------ ------ ------
Diluted common shares 12,104 11,951 12,027 10,858
====== ====== ====== ======
Diluted EPS $1.70 $1.11 $3.65 $2.13
===== ===== ===== =====
</TABLE>
(H) In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of
14
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be
applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1,
1998).
The Company is in the process of quantifying the impacts of adopting SFAS
133 on its financial statements and has not determined the timing of or
method of adoption.
(I) On March 8, 1999, the Company acquired Webco, Inc. ("Webco"), a designer
and manufacturer of custom air handling equipment for industrial,
institutional and commercial customers. For the fiscal year ended October
31, 1998, Webco had net sales of approximately $13,900,000.
(J) On April 23, 1999, the Company completed the acquisition of three
businesses from Caradon plc of the United Kingdom: Peachtree Doors and
Windows, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired
Companies"). Peachtree Doors and Windows, based in Norcross, Georgia, is
a national supplier of premium residential windows, entry doors and
patio doors that target custom and high-end home markets. Thermal-Gard,
based in Punxsutawney, Pennsylvania, manufactures premium replacement
windows, patio doors and sunrooms. CWD Windows and Doors, headquartered
in Calgary, Alberta, is a leading provider of complete window and door
systems for new homes in Western Canada. For the year ended December
31, 1998, the Caradon Acquired Companies had combined net sales of
approximately $169,700,000.
(K) On May 28, 1999, the Company acquired Multiplex Technologies, Inc.
("Multiplex"), a leading manufacturer and designer of high-performance,
multi-room video distribution equipment for home automation/home
entertainment. Multiplex had net sales of approximately $10,000,000 for
the year ended December 31, 1998.
(L) On September 9, 1999 the Company acquired Kroy Building Products, Inc.,
("Kroy") a leading manufacturer of vinyl fencing, railing profiles and
vinyl decking systems for residential and light commercial applications.
Kroy is located in York, Nebraska and had net sales of approximately
$26,000,000 during the twelve months ended June 30, 1999.
15
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
(M) Effective in 1998, the Company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement
introduced a new model for segment reporting, called the "management
approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. The presentation for the
three months and nine months ended October 2, 1999 and October 3, 1998
is consistent with the presentation in the Company's 1998 Form 10-K.
There have been no changes in the Company's segment reporting in 1999.
The Company has three reportable segments: the Residential Building
Products Segment; the Air Conditioning and Heating Products Segment; and
the Windows, Doors and Siding Segment. Other includes corporate related
items, results of insignificant operations, intersegment eliminations and
certain income and expense items not allocated to reportable segments. The
operating results labeled Businesses sold consist of entities sold during
1998 that were previously included in the Company's former Specialty
Products and Distribution Group as well as other businesses sold during
1998.
The Company evaluates segment performance based on operating earnings
before allocations of corporate overhead costs. The income statement
impact of all purchase accounting adjustments, including goodwill and
intangible assets amortization, is included in the operating earnings of
the applicable segment. Intersegment net sales and eliminations were not
material for any of the periods presented.
The tables that follow exclude the results of operations for the plumbing
products business, which was sold in 1998 and had been accounted for as a
discontinued operation.
16
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
Summarized financial information for the Company's reportable segments is
presented in the tables that follow for the three months and nine months
ended October 2, 1999 and October 3, 1998.
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
--------- --------- --------- ---------
(Amounts in thousands)
Net sales:
- ----------
<S> <C> <C> <C> <C>
Residential building products $162,402 $130,743 $ 477,770 $ 331,901
Air conditioning and heating
products 144,152 121,975 417,898 356,645
Windows, doors and siding 226,346 150,306 549,317 390,677
Other 20,593 19,481 59,296 52,564
-------- --------- ---------- ----------
553,493 422,505 1,504,281 1,131,787
Businesses sold --- 35,688 --- 168,521
-------- --------- ---------- ----------
Consolidated net sales $553,493 $ 458,193 $1,504,281 $1,300,308
======== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Operating earnings (loss):
- --------------------------
<S> <C> <C> <C> <C>
Residential building products $27,297 $16,275 $69,878 $36,989
Air conditioning and heating
products 19,342 16,345 50,597 43,564
Windows, doors and siding 17,711 14,519 38,862 22,474
Other, net (5,268) (3,602) (14,418) (11,319)
-------- -------- ------- ---------
59,082 43,537 144,919 91,708
Businesses sold --- 750 --- 5,426
-------- -------- ------- ---------
Consolidated operating
earnings 59,082 44,287 144,919 97,134
Unallocated:
Interest expense (24,225) (22,928) (72,564) (62,126)
Investment income 1,643 3,141 6,145 7,492
-------- -------- -------- ---------
Earnings before provision
for income taxes $ 36,500 $ 24,500 $ 78,500 $ 42,500
======== ======== ======== =========
</TABLE>
17
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
--------- --------- --------- ---------
(Amounts in thousands)
Depreciation and amortization:
- ------------------------------
<S> <C> <C> <C> <C>
Residential building products $4,651 $4,169 $14,711 $ 9,556
Air conditioning and heating
products 2,734 2,217 7,946 6,711
Windows, doors and siding 5,644 4,175 16,202 12,331
Other 292 326 1,274 1,008
------ ------ ------- --------
13,321 10,887 40,133 29,606
Businesses sold --- 280 --- 1,437
------ -------- ------- --------
Consolidated depreciation
and amortization $13,321 $ 11,167 $40,133 $ 31,043
======= ========= ======= ========
</TABLE>
(N) The Company's plans for eliminating certain activities of acquisitions
acquired through the first quarter of 1999 have been finalized. The
Company expects to finalize its plans with respect to the remaining 1999
acquisitions within one year of the respective acquisition dates and,
accordingly, additional liabilities may be recorded as adjustments to
the purchase price allocation for certain of the acquired businesses.
For the nine months ended October 2, 1999, the Company recorded a
liability of approximately $3,400,000 related to employee termination
costs, an approximate $3,200,000 benefit from the curtailment of a
pension plan relating to severed employees, and approximately $2,000,000
related primarily to the exit of certain facilities and operations of
the acquired companies. The change in these liabilities and adjustments,
since the end of the second quarter of 1999, resulted in a net decrease
in goodwill of approximately $1,200,000 in the third quarter. The
Company expects to record an additional estimated $1,000,000 to
$2,000,000 of liabilities and adjustments, for acquisition plans not yet
finalized relating principally to additional employee terminations and
other exit costs arising from the elimination of certain products and
the consolidation of certain functions and operations at the acquired
businesses.
18
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Continued)
Charges to the liabilities for employee terminations include payroll,
payroll taxes and insurance benefits related to severance packages and
were approximately $700,000 and $3,300,000 for the three months and nine
months ended October 2, 1999, respectively. Charges to the liabilities for
other exit costs relate principally to other costs of exiting or closing
facilities and legal and consulting fees that were incurred due to the
implementation of the Company's exit strategies. Charges to the
liabilities for other exit costs were approximately $530,000 and $930,000
for the three months and nine months ended October 2, 1999, respectively.
19
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
Effective in 1998, the Company adopted SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information" and, accordingly, the information for
all periods presented has been reclassified to conform to the presentation for
October 2, 1999.
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment, the Air Conditioning and Heating Products Segment, and the
Windows, Doors and Siding Segment. Other includes corporate related items;
results of insignificant operations and certain income and expense items not
allocable to reportable segments. The results of operations and other data
relating to Businesses sold have been presented separately. Through these
principal segments, the Company manufactures and sells, primarily in the United
States, Canada and Europe, a wide variety of products for the residential and
commercial construction, manufactured housing and the do-it-yourself ("DIY") and
professional remodeling and renovation markets.
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, do-it-yourself and
professional remodeling and renovation markets including kitchen range hoods,
bath fans and combination units (fan, heater and light combinations). The Air
Conditioning and Heating Products Segment manufactures and sells heating,
ventilating, and air conditioning ("HVAC") systems for custom-designed
commercial applications and for manufactured and site-built residential housing.
The Windows, Doors and Siding Segment manufactures and distributes vinyl and
wood windows, entry doors, patio doors, vinyl siding, aluminum trim coil,
soffit, skirting, shutters and vinyl fences and decks for use in the residential
construction, DIY and professional renovation markets.
The Company acquired NuTone on July 31, 1998, Napco on October 9, 1998, Webco on
March 8, 1999, Peachtree Windows and Doors, Thermal-Gard and CWD Windows and
Doors (the "Caradon Acquired Companies") on April 23, 1999, Multiplex on May 28,
1999 and Kroy on September 9, 1999. (See Notes D, I, J, K and L). These
acquisitions have been accounted for under the purchase method of accounting.
Accordingly, the results of NuTone, Napco, Webco, the Caradon Acquired
Companies, Multiplex and Kroy are included in the Company's consolidated results
since the date of their acquisition.
20
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
The tables that follow exclude the results of operations for the plumbing
products business, which was sold on July 10, 1998 and had been accounted for as
a discontinued operation.
During 1998, the Company made several dispositions of non-strategic assets
acquired in the 1997 acquisition of Ply Gem Industries, Inc. ("Ply Gem"). On May
8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley was
treated as an operation held for sale since the acquisition of Ply Gem and
accordingly Studley's operating results are not included in the Company's
consolidated financial results. Four additional Ply Gem subsidiaries were sold
during 1998: on May 22, 1998, the Company sold Sagebrush Sales Inc.; on July 2,
1998, the Company sold Goldenberg Group Inc.; on July 31, 1998 the Company sold
the Ply Gem Manufacturing division of Ply Gem; and on December 10, 1998, the
Company sold Allied Plywood Corporation. Additionally, on December 30, 1998 the
Company sold its M&S Systems LP and Moore-O-Matic, Inc. subsidiaries. The
operating results of these 1998 dispositions are included in the Company's 1998
consolidated results to the date of sale. For the third quarter of 1998, the
combined net sales, operating earnings and earnings before provision for income
taxes of these dispositions were approximately $35,700,000, $750,000 and
$750,000, respectively. For the first nine months of 1998, the combined net
sales, operating earnings and earnings before provision for income taxes of
these dispositions were approximately $168,500,000, $5,400,000 and $5,400,000,
respectively.
The Company does not expect the effect of Businesses sold during 1998 to be
significant to the Company's future operations.
21
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
RESULTS OF OPERATIONS
- ---------------------
The tables that follow present the unaudited net sales and operating earnings
for the Company's principal segments for the third quarter and nine months ended
October 2, 1999 and October 3, 1998, and the dollar amount and percentage change
of such results as compared to the prior comparable period. The amounts in the
tables for the prior comparable period have been reclassified to conform to the
presentation for 1999.
<TABLE>
<CAPTION>
Change in
Third Quarter Third Quarter 1999
October 2, October 3, As Compared To 1998
1999 1998 $ %
----------- ---------- -------- --------
(Dollar amounts in thousands)
Net sales:
- ----------
<S> <C> <C> <C> <C>
Residential building
products $162,402 $130,743 $ 31,659 24.2
Air conditioning and
heating products 144,152 121,975 22,177 18.2
Windows, doors and siding 226,346 150,306 76,040 50.6
Other 20,593 19,481 1,112 5.7
-------- -------- --------
553,493 422,505 130,988 31.0
Businesses sold --- 35,688 (35,688) (100.0)
-------- -------- --------
$553,493 $458,193 $ 95,300 20.8
======== ======== ========
Operating earnings (loss):
- --------------------------
Residential building
products $ 27,297 $ 16,275 $ 11,022 67.7
Air conditioning and
heating products 19,342 16,345 2,997 18.3
Windows, doors and siding 17,711 14,519 3,192 22.0
Other, net (5,268) (3,602) (1,666) 46.3
-------- -------- --------
59,082 43,537 15,545 35.7
Businesses sold --- 750 (750) (100.0)
-------- -------- --------
$ 59,082 $ 44,287 $ 14,795 33.4
======== ======== ========
</TABLE>
22
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
<TABLE>
<CAPTION>
Change in
Nine Months Nine Months 1999
October 2, October 3, As Compared To 1998
1999 1998 $ %
----------- ---------- -------- --------
(Dollar amounts in thousands)
Net sales:
- ----------
<S> <C> <C> <C> <C>
Residential building
products $ 477,770 $331,901 $145,869 43.9
Air conditioning and
heating products 417,898 356,645 61,253 17.2
Windows, doors and siding 549,317 390,677 158,640 40.6
OTher 59,296 52,564 6,732 12.8
---------- ---------- --------
1,504,281 1,131,787 372,494 32.9
Businesses sold --- 168,521 (168,521) (100.0)
---------- ---------- --------
$1,504,281 $1,300,308 $203,973 15.7
========== ========== ========
Operating earnings(loss):
- -------------------------
Residential building
products $ 69,878 $ 36,989 $32,889 88.9
Air conditioning and
heating products 50,597 43,564 7,033 16.1
Windows, doors and siding 38,862 22,474 16,388 72.9
Other, net (14,418) (11,319) (3,099) (27.4)
---------- ---------- --------
144,919 91,708 53,211 58.0
Businesses sold --- 5,426 (5,426) (100.0)
---------- ---------- --------
$ 144,919 $ 97,134 $ 47,785 49.2
========== ========== ========
</TABLE>
23
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1998
(Continued)
The tables that follow, set forth, for the periods presented, (a) certain
unaudited consolidated operating results, (b) the change in the amount and the
percentage change of such results as compared to the prior comparable period,
(c) the percentage which such results bear to net sales, and (d) the change of
such percentages as compared to the prior comparable period. The results of
operations for the third quarter and nine months ended October 2, 1999 are not
necessarily indicative of the results of operations to be expected for any other
interim period or the full year.
Change in
Third Quarter Third Quarter 1999
October 2, October 3, As Compared To 1998
1999 1998 $ %
----------- ---------- -------- --------
(Dollar amounts in millions)
Net sales $553.5 $458.2 $95.3 20.8%
Cost of products sold 396.0 331.2 (64.8) (19.6)
Selling, general and
administrative expense 93.3 78.7 (14.6) (18.6)
Amortization of goodwill
and intangible assets 5.1 4.0 (1.1) (27.5)
------ ----- -----
Operating earnings 59.1 44.3 14.8 33.4
Interest expense (24.3) (22.9) (1.4) (6.1)
Investment income 1.7 3.1 (1.4) (45.2)
------ ----- -----
Earnings from continuing
operations before pro-
vision for income taxes 36.5 24.5 12.0 49.0
Provision for income
Taxes 11.2 (4.7) (42.0)
------ ----- -----
Earnings from continuing
operations 20.6 13.3 7.3 54.9
Earnings from
discontinued operations --- .6 (0.6) (100.0)
Extraordinary loss from
Debt retirements --- (.1) 0.1 100.0
------ ------ -----
Net earnings $ 20.6 $ 13.8 $ 6.8 49.3%
====== ====== =====
24
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Change in
Percentage of net sales Percentage
Third Quarter Ended For the Third
October 2, October 3, Quarter 1999 as
1999 1998 Compared to 1998
---------- ---------- ----------------
Net sales 100.0% 100.0% 0.0%
Cost of products sold 71.5 72.3 0.8
Selling, general and
administrative expense 16.9 17.2 0.3
Amortization of goodwill
and intangible assets .9 .8 (0.1)
---- ---- ----
Operating earnings 10.7 9.7 1.0
Interest expense (4.4) (5.0) 0.6
Investment income .3 .6 (0.3)
---- ---- ----
Earnings from continuing
operations before provision
for income taxes 6.6 5.3 1.3
Provision for income taxes 2.9 2.4 (0.5)
---- ---- ----
Earnings from continuing
operations 3.7 2.9 0.8
Earnings from
discontinued operations --- .1 (0.1)
Extraordinary loss from debt
Retirements --- --- ---
---- ---- ----
Net earnings 3.7% 3.0% 0.7%
==== ==== ====
25
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Change in
Nine Months Ended Nine Months 1999 as
October 2, October 3, Compared To 1998
1999 1998 $ %
----------- ---------- -------- --------
(Dollar amounts in millions)
Net sales $1,504.3 $1,300.3 $204.0 15.7%
Cost of products sold 1,077.9 959.1 (118.8) (12.4)
Selling, general and
administrative expense 266.6 234.2 (32.4) (13.8)
Amortization of goodwill
and intangible assets 14.9 9.9 (5.0) (50.5)
-------- -------- -----
Operating earnings 144.9 97.1 47.8 49.2
Interest expense (72.6) (62.1) (10.5) (16.9)
Investment income 6.2 7.5 (1.3) (17.3)
-------- -------- -----
Earnings from continuing
operations before pro-
vision for income taxes 78.5 42.5 36.0 84.7
Provision for income taxes 34.6 19.4 (15.2) (78.4)
-------- -------- -----
Earnings from continuing
operations 43.9 23.1 20.8 90.0
Earnings from
discontinued operations --- .6 (.6) (100.0)
Extraordinary loss from
debt retirements --- (.1) 0.1 100.0
-------- -------- ------
Net earnings $ 43.9 $ 23.6 $ 20.3 86.0%
======== ======== ======
26
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Change in
Percentage of net sales Percentage
Nine Months Ended For the Nine
October 2, October 3, Months 1999 as
1999 1998 Compared to 1998
---------- ---------- ----------------
Net sales 100.0% 100.0% 0.0%
Cost of products sold 71.7 73.7 2.0
Selling, general and
administrative expense 17.7 18.0 0.3
Amortization of goodwill
and intangible assets 1.0 .8 (0.2)
----- ------ ------
Operating earnings 9.6 7.5 2.1
Interest expense (4.8) (4.8) ---
Investment income .4 .6 (0.2)
----- ------ ------
Earnings from continuing
operations before provision
for income taxes 5.2 3.3 1.9
Provision for income taxes 2.3 1.5 (0.8)
----- ------ ------
Earnings from continuing
operations 2.9 1.8 1.1
Earnings from discontinued
operations --- --- ---
EXtraordinary loss from debt
retirements --- --- ---
----- ------ -----
Net earnings 2.9% 1.8% 1.1%
===== ======= =====
Net sales increased approximately $95,300,000 or approximately 20.8%(or
increased approximately $95,800,000 or approximately 20.9% excluding the effect
of changes in foreign exchange rates) for the third quarter of 1999, as compared
to 1998 and increased approximately $204,000,000 or approximately 15.7%(or
increased approximately $205,500,000 or approximately 15.8% excluding the effect
of changes in foreign exchange rates) for the first nine months of 1999, as
compared to 1998, principally, as a result of acquisitions and higher sales
volume, partially offset by the effect of Businesses sold. Acquisitions
contributed approximately $18,900,000 of the total increase in net sales of
approximately $31,700,000 in the third quarter and approximately $121,500,000 of
the total increase in net sales of approximately $145,900,000 in the first nine
months in the Residential Building Products Segment. Increased domestic sales
volume, partially offset by the effects of changes in foreign exchange rates
accounted for the balance of the increase in this segment. Net sales in the Air
Conditioning and Heating Products Segment increased approximately $22,200,000 or
18.2% in the third quarter of 1999 and increased approximately $61,300,000 or
17.2% in the first nine months of 1999. The increase in net sales in this
27
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
segment is principally, as a result of higher sales volume of products sold to
customers serving the residential site built and commercial markets partially
offset by lower sales of products to customers serving the manufactured housing
market in this segment. In the third quarter of 1999, this segment began to feel
the impact of a slowdown in the manufactured housing industry. It is anticipated
that the weakness in the manufactured housing industry will continue and will
have an adverse effect on this segments sales over the next several quarters.
This segments sales of air conditioning products sold to manufactured housing
customers will improve as the industry takes steps to reduce its retail
inventories of manufactured homes. Approximately $2,800,000 and $8,100,000 in
the third quarter and first nine months of 1999, respectively, of the increase
in net sales in this segment was from an acquisition. Net sales of the Windows,
Doors and Siding Segment increased approximately $76,000,000 and $158,600,000
for the third quarter and first nine months, respectively. These increases arose
primarily from net sales of acquisitions which contributed approximately
$84,500,000 and $170,900,000 for the third quarter and first nine months,
respectively, partially offset by the effect of lower sales volume of certain
lower margin vinyl windows relocated to a low cost manufacturing facility as
this operation closely controlled its sales as it continues the implementation
of improved operating systems and cost-control measures. These overall net
increases in net sales in the Company's three principal segments were partially
offset by the effect of lower net sales attributable to Businesses sold in 1998
of approximately $35,700,000 and $168,500,000 in the third quarter and first
nine months, respectively. As a result of the acquisitions in the second and
third quarters of 1999 in the Windows, Doors and Siding Segment, the performance
of this segment will be more seasonal than in prior years due to the effect of
winter weather conditions normally expected in the fourth and first quarters in
the U.S. and Canada.
Cost of products sold as a percentage of net sales decreased from approximately
72.3% in the third quarter of 1998 to approximately 71.5% in the third quarter
of 1999, and decreased from approximately 73.7% in the first nine months of 1998
to approximately 71.7% in the first nine months of 1999. Changes in the
percentages were, in large part, affected by acquisitions and Businesses sold in
1998. Excluding the effect of Businesses sold, cost of products sold as a
percentage of net sales decreased from approximately 72.0% in the third quarter
of 1998 to approximately 71.5% in the third quarter of 1999 and decreased from
approximately 73.2% in the first nine months of 1998 to approximately 71.7% in
the first nine months of 1999. These decreases in the percentages principally
28
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
resulted from acquisitions (which, for the most part, have a lower level of cost
of sales than the overall group of businesses owned prior to such acquisitions).
To a lesser extent, the effect of higher sales levels in the Residential
Building Products Segment without a proportionate increase in costs also
contributed to the decreases in the percentages. These decreases in the
percentages were partially offset by the effect of higher vinyl resin cost, due
to higher oil prices, without a proportionate increase in sales prices, in the
Windows, Doors and Siding Segment. The rising cost of vinyl resin is also
expected to adversely impact cost of sales percentages in the fourth quarter of
1999. This situation should be mitigated, as price increases for this segments
vinyl products are implemented over the next several quarters.
Overall, changes in the cost of products sold as a percentage of net sales for
one period as compared to another period may reflect a number of factors
including changes in the relative mix of products sold, the effect of changes in
sales prices, material costs and changes in productivity levels.
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 17.2% in the third quarter of 1998 to approximately
16.9% in the third quarter of 1999 and from approximately 18.0% in the first
nine months of 1998 to approximately 17.7% in the first nine months of 1999.
These decreases in the percentages were principally affected as a result of
acquisitions and Businesses sold in 1998. Excluding the effect of Businesses
sold, selling, general and administrative expense as a percentage of net sales
increased from approximately 16.8% in the third quarter of 1998 to approximately
16.9% in the third quarter of 1999, and decreased from approximately 17.8% in
the first nine months of 1998 to approximately 17.7% in the first nine months of
1999. The decrease in the percentage in the first nine months is principally as
a result of an increase in net sales in the Air Conditioning and Heating
Products Segment without a proportionate increase in expense. The effect of the
Windows, Doors and Siding segment acquisitions (which, for the most part, have a
lower level of expense as a percentage of net sales than the overall group of
businesses owned prior to such acquisitions) was offset by the effect of the
acquisitions in the Residential Building Products Segment (which have a higher
level of expense as a percentage of net sales than the overall group of
businesses owned prior to such acquisitions.)
Amortization of goodwill and intangible assets, as a percentage of net sales,
increased from approximately 0.8% of net sales in the third quarter of 1998 to
approximately 0.9% of net sales in the third quarter of 1999 and increased from
29
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
approximately 0.8% of net sales in the first nine months of 1998 to
approximately 1.0% of net sales in the first nine months of 1999, principally as
a result of acquisitions.
Consolidated operating earnings increased approximately $14,800,000 from
approximately $44,300,000 in the third quarter of 1998 as compared to
approximately $59,100,000 in the third quarter of 1999 and increased
approximately $47,800,000 from approximately $97,100,000 in the first nine
months of 1998 as compared to approximately $144,900,000 for the first nine
months of 1999. Businesses acquired in 1998 and 1999 contributed approximately
$9,000,000 of the increase in the third quarter, of which approximately
$6,300,000 was in the Windows, Doors and Siding Segment, and $2,700,000 was in
the Residential Building Products Segment. Businesses acquired in 1998 and 1999
contributed approximately $34,900,000 of the increase in the first nine months
of which approximately $15,300,000 was in the Windows, Doors and Siding Segment,
$18,900,000 was in the Residential Building Products Segment and $700,000 was in
the Air Conditioning and Heating Products Segment. The increase in operating
earnings for the first nine months of 1999 includes approximately $10,300,000 of
estimated synergies and cost reductions realized from the integration of NuTone
into the Company's Residential Building Products Segment, net of approximately
$2,600,000 of costs and expenses. Consolidated operating earnings have been
reduced by depreciation and amortization expense of approximately $13,400,000
and approximately $11,100,000 for the third quarter of 1999 and 1998,
respectively, and have been reduced by depreciation and amortization expense of
approximately $40,100,000 and approximately $31,000,000 for the first nine
months of 1999 and 1998, respectively. Businesses acquired contributed
approximately $2,300,000 of the increase in depreciation and amortization
expense in the third quarter of 1999, of which approximately $1,400,000 was in
the Windows, Doors and Siding Segment, $800,000 was in the Residential Building
Products Segment and $100,000 was in the Air Conditioning and Heating Products
Segment. Businesses acquired contributed approximately $8,700,000 of the
increase in depreciation and amortization expense in the first nine months of
1999, of which approximately $3,500,000 was in the Windows, Doors and Siding
Segment, $5,000,000 was in the Residential Building Products Segment and
$200,000 was in the Air Conditioning and Heating Products Segment. Depreciation
and amortization expense relating to the operating results of Businesses sold in
1998 was approximately $300,000 and $1,400,000 for the third quarter and first
nine months of 1998, respectively. The increase in operating earnings was also
due, in part, to lower costs and expenses of approximately $1,100,000 in the
first nine months, excluding the contribution from acquisitions, in the
30
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Windows, Doors and Siding Segment; increased sales volume without a
proportionate increase in costs and expenses in the Residential Building
Products Segment of approximately $8,400,000 in the third quarter and
$14,000,000 in the first nine months, excluding the contribution from
acquisitions; and increased sales volume without a proportionate increase in
costs and expenses in the Air Conditioning and Heating Products Segment of
approximately $3,000,000 in the third quarter and $6,300,000 in the first nine
months, excluding the contribution from acquisitions. These increases in
operating earnings in the Air Conditioning and Heating Products Segment arose
from higher sales levels of commercial and site-built residential products,
partially offset in the third quarter of 1999, by lower operating earnings of
air conditioning and heating products sold to the manufactured housing market as
compared to the prior year due to a slow-down in the manufactured housing
industry as noted above. The slowdown in the manufactured housing industry is
expected to adversely effect this segment's operating earnings over the next
several quarters. It is anticipated that this segment's operating earnings will
begin to improve from increased sales of air conditioning products once the
industry takes steps to reduce its retail inventories of manufactured homes.It
is also expected, that over the next several quarters, the effect of this
slowdown will continue to be somewhat offset by increased site-built residential
air conditioning product sales in this segment. Operating earnings in the third
quarter of 1999 in the Windows, Doors and Siding Segment decreased approximately
$3,100,000 as compared to 1998, excluding the contribution from acquisitions,
principally as a result of higher vinyl resin costs and lower sales levels of
certain vinyl windows as noted above. The overall increases in operating
earnings were partially offset by the effect of approximately $750,000 and
$5,400,000 of operating earnings of Businesses sold in 1998 in the third quarter
and first nine months of 1998, respectively. The integration of the recently
acquired Caradon Acquired Companies is taking longer than expected and resulted
in a lower contribution to earnings in the third quarter of 1999 than
anticipated. The Company anticipates lower earnings levels then previously
expected over the next several quarters in the Windows, Doors and Siding Segment
due to the seasonality of this segment's 1999 acquisitions and as the effects of
the integration of the Caradon Acquired Companies and the lower sales levels of
certain vinyl windows, noted above, continue to be felt. The Company also
expects future operating earnings in this segment to be adversely affected by
higher vinyl resin costs until increases in sales prices to customers can be
implemented over the next several quarters.
Operating earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries which manufacture
31
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
built-in ventilation products and window and door systems, were approximately
8.6% and 5.2% of operating earnings (before corporate overhead) in the third
quarter of 1999 and 1998, respectively, and were approximately 6.5% and 5.9% of
operating earnings (before corporate overhead) in the first nine months of 1999
and 1998, respectively. The increase in foreign operating earnings as a
percentage of operating earnings in the first nine months of 1999 as compared to
1998 is principally a result of the increased operating earnings from foreign
acquisitions. Sales and earnings derived from the international market are
subject to the risks of currency fluctuations.
Interest expense in the third quarter of 1999 increased approximately $1,400,000
or approximately 6.1% as compared to the third quarter of 1998, and increased
approximately $10,500,000 or approximately 16.9% in the first nine months of
1999 as compared to the first nine months of 1998 primarily as a result of the
sale of the 8 7/8% Notes on July 31, 1998. This increase was partially offset by
the paydown of approximately $27,700,000 of debt with a portion of the proceeds
from the sale of businesses in 1998.
Investment income decreased approximately $1,400,000 or approximately 45.2% in
the third quarter of 1999 as compared to the third quarter of 1998 and decreased
approximately $1,300,000 or approximately 17.3% in the first nine months of 1999
as compared to the first nine months of 1998. The decrease in the third quarter
and the first nine months of 1999 is principally due to lower average invested
balances as a result of funds used for acquisitions and lower yields earned on
short-term investments and marketable securities.
The provision for income taxes was approximately $15,900,000 for the third
quarter of 1999, as compared to $11,200,000 for the third quarter of 1998 and
approximately $34,600,000 for the first nine months of 1999, as compared to
$19,400,000 for first nine months of 1998. The income tax rates differed from
the United States Federal statutory rate of 35% principally as a result of state
income tax provisions, nondeductible amortization expense (for tax purposes),
the effect of foreign income tax on foreign source income, changes in tax
reserves and the effect of product development tax credits from foreign
operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company is highly leveraged and expects to continue to be highly leveraged
for the foreseeable future. At October 2, 1999, the Company had consolidated
debt of approximately $1,037,400,000 consisting of (i) $16,000,000 of short-term
32
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
borrowings and current maturities of long-term debt, (ii) $126,200,000 of notes,
mortgage notes and other indebtedness,(iii) $209,300,000 of the 8 7/8% Notes,
(iv) $307,800,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") (v)
$174,200,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi)
$203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes").
At October 2, 1999, the Company had consolidated unrestricted cash, cash
equivalents and marketable securities of approximately $96,983,000 as compared
to approximately $209,633,000 at December 31, 1998 and the Company's debt to
equity ratio was approximately 4.0:1 at October 2, 1999 as compared to 4.7:1 at
December 31, 1998.
The Company's ability to pay interest on or to refinance its indebtedness
depends on the successful integration of the operations of recent acquisitions
and the Company's future performance, which is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. There can be no assurance that the Company will generate sufficient
cash flow from the operation of its subsidiaries or that future financings will
be available on acceptable terms or in amounts sufficient to enable the Company
to service or refinance its indebtedness, or to make necessary capital
expenditures.
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and possible dispositions of certain of its businesses
on an ongoing basis and at any given time may be engaged in discussions or
negotiations with respect to possible acquisitions or dispositions. Acquisitions
in 1999 were principally funded through the use of unrestricted cash and
investments.
The indentures and other agreements governing the Company and its subsidiaries'
indebtedness (including the indentures for the 8 7/8% Notes, the 9 1/8% Notes,
the 9 1/4% Notes, the 9 7/8% Notes and the credit agreement covering the Ply Gem
credit facility) contain restrictive financial and operating covenants including
covenants that restrict the ability of the Company and its subsidiaries to
complete acquisitions, pay dividends, incur indebtedness, make investments, sell
assets and take certain other corporate actions.
The Company expects to meet its cash flow requirements through fiscal 1999 from
cash generated from operations, existing cash, cash equivalents and marketable
securities, and financings, which may include securitization of accounts
receivable and mortgage or capital lease financings.
33
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
On March 8, 1999 the Company acquired Webco, a designer and manufacturer of
custom air handling equipment. For the year ended October 31, 1998, Webco had
net sales of approximately $13,900,000.
On April 23, 1999, the Company acquired the Caradon Acquired Companies from
Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of
Caradon plc, a United Kingdom company. The Caradon Acquired Companies
manufacture and sell premium residential windows, entry doors and patio doors to
both the new construction and replacement markets. For the year ended December
31, 1998, the Caradon Acquired Companies had combined net sales of approximately
$169,700,000.
On May 28, 1999, the Company acquired Multiplex, a leading manufacturer and
designer of high-performance, multi-room video distribution equipment for home
automation/home entertainment.
Multiplex had net sales of approximately $10,000,000 for the year ended December
31, 1998.
On September 9, 1999 the Company acquired Kroy Building Products, Inc., ("Kroy")
a leading manufacturer of vinyl fencing, railing profiles and vinyl decking
systems for residential and light commercial applications. Kroy is located in
York, Nebraska and had net sales of approximately $26,000,000 during the twelve
months ended June 30, 1999.
As the Company integrates the 1998 and 1999 acquisitions into its businesses, it
expects to achieve significant synergies, cost savings and reductions during
1999, partially offset by certain costs and expenses. The Company's plans for
eliminating certain activities for acquisitions acquired through the first
quarter of 1999 have been finalized. The Company expects to record an estimated
additional $1,000,000 to $2,000,000 of liabilities or adjustments for
acquisition plans not yet finalized. Acquisition integration liabilities and
adjustments relate principally to additional employee terminations and other
exit costs of certain products and the consolidation of certain functions and
operations at the acquired businesses. The total expenditures associated with
exit costs related to the integration effort at October 2, 1999 are expected to
be funded from the Company's operating cash flow. If significant difficulty is
encountered during the integration process, or if such synergies and cost
savings are not realized, the results of operations, cash flow and financial
condition of the Company likely will be adversely affected. There can be no
assurance that the Company will be able to successfully manage and integrate the
34
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
1998 and 1999 acquisitions.(See Note D, I, J, K, L and N of the Notes to the
Unaudited Condensed Consolidated Financial Statements included elsewhere
herein.)
Unrestricted cash and cash equivalents decreased from approximately $87,876,000
at December 31, 1998 to approximately $71,998,000 at October 2, 1999. Marketable
securities available for sale decreased from approximately $121,757,000 at
December 31, 1998 to approximately $24,985,000 at October 2, 1999. The Company's
investment in marketable securities at October 2, 1999 consisted primarily of
certificates of deposit, commercial paper and bank issued money market
instruments. At October 2, 1999, approximately $23,028,000 of the Company's cash
and investments were pledged as collateral for insurance, employee benefits and
other requirements and were classified as restricted in current assets in the
Company's accompanying condensed consolidated balance sheet.
Capital expenditures were approximately $41,400,000 for the year 1998,
approximately $34,400,000 in the first nine months of 1999 and are expected to
range between approximately $45,000,000 and $50,000,000 for all of 1999.
The Company's Board of Directors has authorized a number of programs to purchase
shares of the Company's Common and Special Common Stock. The most recent of
these programs was announced on May 20, 1999, and allows the Company to purchase
up to 500,000 shares of the Company's Common and Special Common Stock in open
market or negotiated transactions, subject to market conditions, cash
availability and provisions of the Company's outstanding debt instruments. As of
November 5, 1999, the Company has purchased approximately 280,600 shares of its
Common and Special Common Stock under this program for approximately $8,600,000
and accounted for such share purchases as Treasury Stock.
At November 5, 1999, approximately $87,000,000 was available for the payment of
cash dividends, stock purchases or other restricted payments as defined under
the terms of the Company's most restrictive Indenture.
The Company's working capital and current ratio decreased from approximately
$337,207,000 and 2.0:1, respectively, to approximately $331,883,000 and 1.9:1,
respectively, between December 31, 1998 and October 2, 1999, principally as a
result of payments related to acquisitions partially offset by working capital
acquired from such acquisitions and net of the factors described below.
35
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Accounts receivable increased approximately $85,367,000 or approximately 41.6%,
between December 31, 1998 and October 2, 1999, while net sales increased
approximately $115,458,000 or approximately,26.4% in the third quarter of 1999
as compared to the fourth quarter of 1998. These increases are a result of the
1999 acquisitions, which contributed approximately $62,100,000 to net sales and
approximately $37,247,000 to accounts receivable in the first nine months of
1999. The rate of change in accounts receivable in certain periods may be
different than the rate of change in sales in such periods principally due to
the timing of net sales. Increases or decreases in net sales near the end of any
period generally result in significant changes in the amount of accounts
receivable on the date of the balance sheet at the end of such period, as was
the situation on October 2, 1999 as compared to December 31, 1998. The Company
has not experienced any significant overall changes in credit terms, collection
efforts, credit utilization or delinquency in accounts receivable in 1999.
Inventories increased approximately $45,877,000 or approximately 28.2%, between
December 31, 1998 and October 2, 1999. Acquisitions contributed approximately
$27,047,000 to the increase in inventory for the first nine months of 1999.
Accounts payable increased approximately $43,401,000 or approximately 36.1%,
between December 31, 1998 and October 2, 1999. Acquisitions contributed
approximately $17,471,000 to the increase in accounts payable.
36
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
Unrestricted cash and cash equivalents decreased approximately $15,878,000 from
December 31, 1998 to October 2, 1999, principally as a result of the following:
Condensed
Consolidated
Cash Flows
-------------
Operating Activities--
Cash flow from operations, net.................. $104,861,000
Increase in accounts receivable, net............ (54,968,000)
Increase in inventories......................... (23,480,000)
Decrease in prepaids and other current assets... 2,276,000
Increase in accounts payable.................... 35,385,000
Decrease in accrued expenses and taxes.......... (13,092,000)
Investing Activities---
Net cash paid for businesses acquired........... (113,018,000)
Proceeds from the sale of marketable
securities, net............................... 97,044,000
Capital expenditures............................ (34,400,000)
Increase in restricted cash and investments..... (3,968,000)
Financing Activities---
Increase in borrowings, net..................... 1,395,000
Purchase of Nortek Common and Special
Common Stock.................................. (6,982,000)
Other, net....................................... (6,931,000)
------------
$(15,878,000)
============
The impact of changes in foreign currency exchange rates on cash was not
material and has been included in other, net.
The Company's debt-to-equity ratio decreased from approximately 4.7:1 at
December 31, 1998 to 4.0:1 at October 2, 1999, primarily as a result of the
increase in equity due to net earnings for the first nine months of 1999 and the
issuance of Common Stock as partial consideration for an acquisition. This was
partially offset by the effect of the purchase of Nortek Common and Special
Common Stock, changes in currency translation and the net increase in
borrowings. (See the Consolidated Statement of Stockholders' Investment included
elsewhere herein.)
At December 31, 1998, the Company's wholly owned subsidiary, Ply Gem, had a net
operating loss carry forward of approximately $61,300,000 that expires in 2011
and is subject to certain limitations imposed by the Internal Revenue Code. The
Company expects to utilize approximately $40,000,000 of this net operating loss
in its 1999 federal tax return, which will result in lower than expected federal
income tax payments of approximately $14,000,000 for 1999.
37
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
INFLATION, TRENDS AND GENERAL CONSIDERATIONS
- --------------------------------------------
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and the possible dispositions of certain of its
businesses on an ongoing basis and at any given time may be engaged in
discussions or negotiations with respect to possible acquisitions or
dispositions.
The Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States and in Canada where inclement weather
during the winter months usually reduces the level of building and remodeling
activity in both the home improvement and new construction markets. The
Company's lower sales levels usually occur during the first and fourth quarters.
Since a high percentage of the Company's manufacturing overhead and operating
expenses are relatively fixed throughout the year, operating income and net
earnings tend to be lower in quarters with lower sales levels. As a result of
the recent acquisitions in the Windows, Doors and Siding Segment the performance
of this group will be more seasonal than in prior years due to the number of
businesses that are affected by winter weather conditions. In addition, the
demand for cash to fund the working capital of the Company's subsidiaries is
greater from late in the first quarter until early in the fourth quarter.
MARKET RISK
- -----------
As discussed more specifically below, the Company is exposed to market risks
related to changes in interest rates, foreign currencies and commodity pricing.
The Company uses derivative financial instruments periodically on a limited
basis to hedge economic exposures. The Company does not enter into derivative
financial instruments or other financial instruments for trading purposes.
38
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
There have been no significant changes in market risk from the December 31, 1998
disclosures included in the Company's Annual Report on Form 10-K.
A. Interest rate risk
The Company is exposed to market risk from changes in interest rates primarily
through its investing and borrowing activities. In addition, the Company's
ability to finance future acquisition transactions may be impacted if the
Company is unable to obtain appropriate financing at acceptable interest rates.
The Company's strategy for managing interest rate exposure is to invest in
short-term, highly liquid investments and marketable securities. Short-term
investments primarily consist of money market accounts, certificates of deposit
and, corporate commercial paper with original maturities of 90 days or less.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. In addition, the
Company has hedged its exposure on a substantial portion of its variable rate
debt by entering into interest rate swap agreements to lock in a fixed rate.
B. Foreign currency risk
The Company's results of operations are affected by fluctuations in the value of
the U.S. dollar as compared to the value of currencies in foreign markets
primarily related to changes in the Italian Lira and the Canadian Dollar. For
the first nine months of 1999, the net impact of foreign currency changes was
not material to the Company's financial condition or results of operations. The
Company manages its exposure to foreign currency exchange risk principally by
trying to minimize the Company's net investment in foreign assets through the
use of strategic short and long-term borrowings at the foreign subsidiary level.
The Company generally does not enter into derivative financial instruments to
manage foreign currency exposure. At October 2, 1999, no foreign currency
hedging contracts were outstanding.
The Company's operations in Europe have not been materially impacted by the
introduction of the European single currency, the Euro.
39
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
C. Commodity pricing risk
The Company is subject to significant market risk with respect to the pricing of
its principal raw materials, which include, among others, steel, copper,
packaging material, plastics, resins, glass, wood and aluminum. If prices of
these raw materials were to increase dramatically, the Company may not be able
to pass such increases on to its customers and, as a result, gross margins could
decline significantly. The Company manages its exposure to commodity pricing
risk by continuing to diversify its product mix, strategic buying programs and
vendor partnering.
The Company generally does not enter into derivative financial instruments to
manage commodity-pricing exposure. At October 2, 1999, the Company did not have
any outstanding commodity forward contracts.
YEAR 2000 DISCLOSURE
- --------------------
The Year 2000 ("Y2K") issue refers to and arises from deficient computer
programs and related products, such as embedded chips, which do not properly
distinguish between a year that begins with "20" instead of "19" beginning on
January 1, 2000. If not corrected, many businesses and processes could fail or
create erroneous results. The extent of the potential impact of the Y2K problem
is not yet known, and if not timely corrected, it could affect the global
economy. As required by recent guidance from the Securities and Exchange
Commission ("SEC") applicable to all public companies, the following disclosure
provides detail regarding the Company's Y2K compliance.
A. The Company's Readiness:
To manage its Y2K program, the Company established a corporate-wide initiative
and has divided its efforts into five areas: awareness (communication to
employees, vendors and suppliers of the Y2K issue), assessment (a complete
inventory of all aspects of the business that might be affected),
remediation/validation (develop plans to correct all issues identified from the
assessment stage), implementation (corrective measures taken to solve the Y2K
issues identified) and contingency (alternative actions developed in the event
that corrective measures are not implemented by Y2K or are not effective).
Further, the Company has identified three key areas of concentration:
40
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(COntinued)
information technology ("IT") systems, non-IT systems and third parties
(suppliers and customers). The Company's subsidiaries are in various stages of
completion of this initiative, including the implementation and contingency
stages, for the Y2K issue. Certain of the Company's subsidiaries are
simultaneously working on the implementation and contingency stages of this
initiative. In the third quarter of 1999, the Company's subsidiaries made
significant progress in the implementation and contingency stages. Overall the
Company believes that it is in the contingency stage of addressing the Y2K
issue. Although the Company believes that all IT and non-IT systems material to
the Company's business will be Y2K compliant on or before December 31, 1999, it
cannot predict the outcome or the success of its Y2K program, or that third
party systems are or will be Y2K compliant, or that the costs required to
address the Y2K initiative, or that the impact of a failure to achieve
substantial Y2K compliance, will not have a material adverse effect on the
Company's business, financial condition or results of operations.
1. IT systems: The Company has, previously conducted a comprehensive review of
its computer systems to identify those that could be affected by the Y2K
issue. Substantially all of the Company's operating systems and database
systems that were identified as not Y2K compliant have been replaced or
modified. The Company presently believes that with minor replacement and
modifications (conversion and testing in progress) to the remaining non Y2K
compliant software, the Y2K problem will not pose significant operational
problems for the Company's computer systems as so modified.
2. Non-IT systems: Non-IT systems are those that typically include "embedded"
technology such as microcontrollers and chips. The Company has evaluated
the effect of the Y2K problem on all non-IT systems including all
telecommunications equipment, shop-floor controls, alarm systems and any
other equipment that can potentially use microcontrollers, chips or other
systems affected by the Y2K problem.
3. Third parties: Due to the pervasive use of computers by the Company's
suppliers, customers, financial institutions, and other third parties, the
Y2K problem could have a material impact on the Company if not timely
addressed by such third parties. To assess third party readiness, the
Company is surveying its principal suppliers and financial institutions and
receiving responses that indicate that such parties are
41
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
in the process of adequately addressing the problem. In cases where key
suppliers have not responded or are not adequately addressing the issue,
the Company will determine what contingency plans will be necessary to
protect the Company's interests. While the Company has not surveyed all its
customers, it has received surveys from many of its principal customers
that indicate that they are also addressing the problem. See the discussion
under Contingency Plans/Risks.
The Company operates in a decentralized environment and major computer systems
are, therefore, in various states of readiness. The Company has 26 businesses
with various IT systems that support 100% of the Company's anticipated net sales
for 1999 including the six businesses acquired in 1999 and one business started
in 1999. The Company estimates that the remediation effort for IT systems Y2K
issues of 16 business units representing approximately 60% of net sales for 1999
are approximately 95% complete. The Company estimates that the remediation
effort for the IT systems Y2K issues of nine business units representing
approximately 29% of net sales for 1999 are approximately 85% complete, and one
business unit representing approximately 11% of net sales for 1999 is
approximately 75% complete.
Substantially all of the non-IT systems, including telephone systems and office
equipment, have been tested. Those found not to be Y2K compliant are in the
process of being or have been replaced or repaired. Machinery and equipment
testing and remediation are in process. Third party inquiry and contingency
efforts are also in progress. Combined, the Company estimates the non-IT systems
efforts are approximately 90% complete overall, while third party evaluations,
including contingency planning, are 80% complete overall.
B. Cost:
The Company's estimate of expenditures for remediation directly related to
correcting Y2K issues is approximately $6,000,000, including businesses acquired
in 1999. The total estimated expenditures of approximately $6,000,000 consist of
approximately $2,000,000 of IT computer hardware equipment costs, approximately
$3,000,000 of IT software and non-IT computer hardware expenditures and
approximately $1,000,000 of other non-IT expenditures. The Company has spent
approximately $5,200,000 through October 2, 1999. All of the Company's Y2K
compliance expenditures have been or are expected to be funded from the
Company's operating cash flow.
42
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
The Company's Y2K compliance budget does not include significant amounts for
hardware replacement because the Company has historically employed a strategy to
continually upgrade its computer systems. Consequently, the Company's Y2K
compliance budget has not required the diversion of funds from or the
postponement of the implementation of other planned IT projects.
Actual costs to be incurred by the Company may deviate from the estimates above,
as a result of dependence on a number of factors which cannot be accurately
predicted, including, among others, the extent and difficulty of the remaining
remediation and other work to be done, the availability and cost of consultants,
and the extent of testing required to demonstrate Y2K compliance.
C. Contingency Plans/Risks:
The Company is in the process of preparing appropriate contingency plans for
significant internal or external exposures that are identified. While the
Company is not presently aware of any such significant exposure, there can be no
guarantee that the systems of third parties on which the Company relies will be
converted in a timely manner, or that a failure to properly convert by another
company would not have a material adverse effect on the Company. The Company's
contingency plans for IT systems are being evaluated and addressed on an
individual subsidiary by subsidiary basis. As all testing of all systems is not
expected to be completed until early in the fourth quarter, not all contingency
plans have been completed. In planning for issues not resolved or contemplated
for IT systems, the Company plans to allocate internal resources and may retain
dedicated consultants and vendor representatives to be available to take
corrective action, if necessary. However, the Company will adjust existing and
adopt additional plans if situations arise requiring modifications to existing
contingency plans or new contingency plans, as required.
The Company's contingency plans for non-IT systems are also being continuously
evaluated and have also not been completed. The Company's subsidiaries do,
however, have various business interruption contingency plans in place. These
plans are in the process of being evaluated for Y2K scenarios and will be
adjusted as appropriate. As discussed below, the Company will develop, if
necessary, appropriate contingency plans to address additional issues the
Company discovers will have an adverse impact on the Company's ability to
conduct business.
Based on current information, the Company believes that the Y2K problem will not
have a material adverse effect on the Company, its business or its financial
43
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(COntinued)
condition as a result of those issues directly under its control. However, there
can be no assurance that Y2K remediation by the Company or third parties will be
properly and timely completed, and failure to do so could have a material
adverse effect on the Company, its business and its financial condition. The
Company believes that the greatest risk presented by the Y2K problem is from
third parties, such as suppliers, financial institutions, utility providers and
customers, among others, who may not have adequately addressed the problem. A
failure of any such third party's computer or other applicable systems in
sufficient magnitude could materially and adversely affect the Company. The
Company is not presently able to quantify this risk especially with respect to
utility providers.
The Company does not consider that catastrophic events resulting in massive and
prolonged disruption of service such as a world-wide disruption of the financial
system, failure of government, both domestic (local, state and federal) and
foreign or a national disruption of electrical power are a reasonable most
likely worst case Y2K scenario. Accordingly, the Company will not develop any
plans for such catastrophic events. The Company recognizes the risks in its
ability to conduct business if other key suppliers in utilities, communications,
transportation, banking and government, both domestic (local, state and federal)
and foreign, are not Y2K ready. The Company is monitoring news and progress
reports pertaining to those critical services to determine the effect on the
Company's ability to conduct business as a result of Y2K issues on the economy
if those and other key suppliers in utilities, communications, transportation,
banking and government, both domestic (local, state and federal) and foreign,
cease to function.
It is the Company's opinion that the most likely worst case scenario it faces
for which it can make reasonable contingency plans are in two areas. One area of
concern is the temporary loss of utilities, specifically power in certain areas
of North America and Europe. The other concern is the inability of certain key
suppliers of materials to deliver goods when a subsidiary needs them. Each of
the Company's subsidiaries have or are making contingency plans to address both
situations on an individual basis.
Contingency plans for the temporary loss of power in a specific area are being
addressed by each facility within each subsidiary. In some cases this type of
disruption is expected to have a negligible impact as a specific subsidiary or
facility may have plant shutdowns planned during this period or because this
44
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
period has traditionally been a time of low customer shipments. In other cases
where the business is not seasonal, the use of generators is being investigated
to power specific portions of specific facilities where available and reasonably
priced. Increased inventory levels for the fourth quarter of 1999 are being
investigated. In certain cases where generator usage is not a feasible
alternative, production and shipments to customers may be scheduled during a
period other than early January 2000 when a temporary loss of power might occur.
Most subsidiaries are planning to have spot generators on-site to power specific
areas of each building including computer systems. In many cases, a central
computer system handles computer processing and LAN systems of the remote
facilities of the subsidiary. For those subsidiaries with facilities in
geographical areas where cold weather dominates the early part of each year, the
risk of freezing temperatures is a concern. In those cases, spot-heating
equipment is planned to maintain Company facilities at a temperature above which
building damage can occur.
Another major risk that the Company has identified as most likely is the loss of
a critical supplier of materials. This risk has the potential to disrupt the
Company's subsidiaries ability to deliver goods to its customers. Each
subsidiary is performing an ongoing assessment of its critical suppliers to
determine this risk. Each subsidiary's contingency plan will address each
supplier identified as being critical and at risk. In some cases suppliers are
being asked to stockpile a supply of materials specifically for the subsidiary.
In other cases alternative suppliers are being evaluated and qualified. In some
cases, as a last resort, a subsidiary will stockpile materials if the supplier
is unable to perform that service for the subsidiary. In all cases, the working
capital needs and requirements of the Company are being considered as part of
the subsidiary's contingency plan. The Company's policy is not to increase
working capital requirements as part of a particular contingency plan except
where no other alternative contingency plan is expected to work. Contingency
plans are continually evaluated and adjusted or new plans made as each
individual situation changes.
FORWARD-LOOKING STATEMENTS
- --------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this discussion
and throughout this document, words, such as "intends," "plans," "estimates,"
"believes," "anticipates" and "expects" or similar expressions are intended to
identify forward-looking statements. These statements are based on the Company's
current plans and expectations and involve risks and uncertainties, over which
45
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999
AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
(Continued)
the Company has no control, that could cause actual future activities and
results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and operating results to differ include the availability and cost of
certain raw materials costs, (including, among others, steel, copper, packaging
materials, plastics resins, glass, wood and aluminum) and purchased components,
the level of domestic and foreign construction and remodeling activity affecting
residential and commercial markets, interest rates, employment, inflation, Y2K
readiness, currency translation, consumer spending levels, operating in
international economies, the rate of sales growth, price, and product and
warranty liability claims. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Readers are also urged to carefully
review and consider the various disclosures made by the Company, in this
document, as well as the Company's periodic reports on Forms 10-K, 10-Q, 10-Q/A
and 8-K, filed with the SEC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed herewith).
(b) No reports on Form 8-K were filed by
the registrant during the period
46
<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
November 16, 1999
47
<PAGE>
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