FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
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 April 28, 2000 was
10,823,649. The number of shares of Special Common Stock outstanding as of April
28, 2000 was 549,326.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
April 1, Dec. 31,
2000 1999
---- ----
(Unaudited)
Assets
Current Assets:
Unrestricted
Cash and cash equivalents $ 66,843 $ 80,893
Marketable securities available for
sale 4,000 34,219
Restricted
Cash, investments and marketable
securities at cost, which
approximates market 10,933 11,240
Accounts receivable, less allowances
of $12,067 and $13,019 271,246 243,763
Inventories
Raw materials 97,117 89,581
Work in process 20,323 20,844
Finished goods 133,889 102,253
---------- ----------
251,329 212,678
---------- ----------
Prepaid expenses 18,274 11,864
Other current assets 12,724 16,787
Prepaid income taxes 66,500 66,824
---------- ----------
Total current assets 701,849 678,268
---------- ----------
Property and Equipment, at Cost:
Land 17,043 16,270
Buildings and improvements 125,680 127,736
Machinery and equipment 353,541 348,445
---------- ----------
496,264 492,451
Less accumulated depreciation 171,513 163,834
---------- ----------
Total property and equipment, net 324,751 328,617
---------- ----------
Other Assets:
Goodwill, less accumulated amortization
of $60,952 and $56,942 584,152 589,532
Intangible assets, less accumulated
amortization of $17,495 and $15,956 133,386 133,040
Deferred debt expense 21,240 22,068
Restricted investments and marketable
securities 16,258 15,677
Other 43,233 42,482
---------- ----------
798,269 802,799
---------- ----------
$1,824,869 $1,809,684
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Continued)
(Dollar amounts in thousands)
April 1, Dec. 31,
2000 1999
--------- ---------
(Unaudited)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 9,116 $ 8,476
Current maturities of long-term debt 5,614 5,564
Accounts payable 193,323 149,772
Accrued expenses and taxes, net 159,643 189,964
---------- ----------
Total current liabilities 367,696 353,776
---------- ----------
Other Liabilities
Deferred income taxes 73,703 73,499
Other 99,703 98,976
---------- ----------
173,406 172,475
---------- ----------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 1,022,138 1,023,616
Stockholders' Investment:
Preference stock, $1 par value;
authorized 7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,740,517 and
18,738,292 shares issued 18,740 18,738
Special common stock, $1 par value;
authorized 5,000,000 shares; 839,711
and 840,436 shares issued 840 841
Additional paid-in capital 208,808 208,755
Retained earnings 147,266 143,266
Accumulated other comprehensive loss (13,027) (11,822)
Less --treasury common stock at cost,
7,844,217 and 7,793,217 shares (98,931) (97,894)
--treasury special common stock
at cost, 290,067 and
290,054 shares (2,067) (2,067)
---------- ----------
Total stockholders' investment 261,629 259,817
---------- ----------
$1,824,869 $1,809,684
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The
Three Months Ended
April 1, April 3,
2000 1999
--------- ----------
(In thousands except per share amounts)
(Unaudited)
Net Sales $491,507 $406,700
-------- --------
Costs and Expenses:
Cost of products sold 358,218 296,916
Selling, general and administrative
expense 97,737 77,383
Amortization of goodwill and
intangible assets 5,752 4,784
-------- --------
461,707 379,083
-------- --------
Operating earnings 29,800 27,617
Interest expense (24,310) (23,966)
Investment income 1,910 2,849
-------- --------
Earnings before provision for income
taxes 7,400 6,500
Provision for income taxes 3,400 3,000
-------- --------
Net Earnings $ 4,000 $ 3,500
======== ========
Net Earnings per share of common
stock:
Basic $ .35 $ .30
======= =======
Diluted $ .35 $ .29
======= =======
Weighted Average Number of Shares:
Basic 11,484 11,747
======== ========
Diluted 11,549 11,925
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the
Three Months Ended
April 1, April 3,
2000 1999
-------- --------
(Amounts in thousands)
(Unaudited)
Cash Flows from operating activities:
Net earnings $ 4,000 $ 3,500
-------- --------
Adjustments to reconcile net earnings
to cash:
Depreciation and amortization expense 15,555 13,041
Non-cash interest expense 985 835
Changes in certain assets and
liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable, net (28,675) (16,661)
Inventories (39,456) (13,266)
Prepaids and other current assets (3,926) (558)
Accounts payable 44,622 12,992
Accrued expenses and taxes (30,392) (36,594)
Long-term assets, liabilities and other,
net (1,171) (1,282)
--------- --------
Total adjustments to net earnings (42,458) (41,493)
--------- --------
Net cash used in operating activities $(38,458) $(37,993)
--------- --------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the
Three Months Ended
April 1, April 3,
2000 1999
-------- --------
(Amounts in thousands)
(Unaudited)
Cash Flows from investing activities:
Capital expenditures $ (7,667) $(11,772)
Net cash paid for businesses acquired --- (8,023)
Purchase of investments and marketable
securities (4,004) (54,311)
Proceeds from the sale of investments
and marketable securities 34,439 85,432
Change in restricted cash
and investments (21) 5,743
Other, net 2,630 (3,893)
-------- --------
Net cash provided by investing
activities 25,377 13,176
-------- --------
Cash Flows from financing activities:
Change in borrowings, net --- (2,972)
Purchase of Nortek Common and Special
Common Stock (1,029) (2,390)
Other, net 60 111
-------- --------
Net cash used in financing activities (969) (5,251)
Net decrease in unrestricted cash and
cash equivalents (14,050) (30,068)
Unrestricted cash and cash equivalents
at the beginning of the period 80,893 87,876
Unrestricted cash and cash equivalents
at the end of the period $ 66,843 $ 57,808
======== ========
Interest paid $ 44,171 $ 43,842
======== ========
Income taxes paid, net $ 1,762 $ 2,598
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED APRIL 3, 1999
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income(Loss) Income(Loss)
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) ---
Net earnings --- --- --- 3,500 --- --- $3,500
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (1,208) (1,208)
Unrealized decrease in
the value of market-
able securities --- --- --- --- --- 212 212
------
Comprehensive income $2,504
======
6,282 shares of
special common stock
converted into 6,282
shares of common stock 6 (6) --- --- --- ---
10,865 shares of common
stock issued upon
exercise of stock
options 11 --- 90 --- --- ---
89,508 shares of
treasury stock
acquired --- --- --- --- (2,390) ---
235,000 shares of common
stock issued as
partial consideration
for an acquisition 235 --- 6,080 --- --- ---
------- ---- -------- ------- -------- --------
Balance, April 3, 1999 $18,680 $849 $207,796 $97,466 $(88,059) $(12,592)
======= ==== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED APRIL 1, 2000
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Loss Income(Loss)
(Dollar amounts in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1999 $18,738 $841 $208,755 $143,266 $(99,961) $(11,822) $ ---
Net earnings --- --- --- 4,000 --- --- 4,000
Other comprehensive
income:
Currency translation
adjustment --- --- --- --- --- (1,160) (1,160)
Unrealized increase in
the value of market-
able securities --- --- --- --- --- (45) (45)
------
Comprehensive income $2,795
======
725 shares of
special common stock
converted into 725
shares of common stock 1 (1) --- --- --- ---
1,500 shares of common
stock issued upon
exercise of stock
options 1 --- 53 --- --- ---
51,013 shares of
treasury stock
acquired --- --- --- --- (1,037) ---
------- ---- -------- -------- --------- --------
Balance, April 1, 2000 $18,740 $840 $208,808 $147,266 $(100,998) $(13,027)
======= ==== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000 AND APRIL 3, 1999
(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. 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) 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.
(C) 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 programs were announced on May 4, 2000, to purchase up to 1,000,000
shares of the Company's Common and Special Common Stock and on May 20,
1999, to purchase up to 500,000 shares of the Company's Common and Special
Common Stock. Both programs allow for purchases in open market or
negotiated transactions and are subject to market conditions, cash
availability and provisions of the Company's outstanding debt instruments.
As of May 4, 2000, all 500,000 shares of the Company's Common and Special
Common Stock authorized by the May 20, 1999 program have been purchased for
approximately $13,300,000 and such share purchases were accounted for as
Treasury Stock. There have been no purchases under the May 4, 2000 program.
At April 28, 2000, approximately $86,900,000 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 debt covenant related to
such payments.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000 AND APRIL 3, 1999
(Continued)
(D) 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 earnings per share results. Diluted earnings per share
amounts have been computed using the weighted average number of common and
common equivalent shares and the dilutive potential common and special
common shares outstanding during each period.
A reconciliation between basic and diluted earnings per share from
continuing operations is as follows:
Three Months Ended
April 1, April 3,
2000 1999
-------- --------
(In thousands except per share amounts)
Net earnings $ 4,000 $ 3,500
Basic EPS:
Basic common shares 11,484 11,747
======= =======
Basic EPS $ .35 $ .30
======= =======
Diluted EPS:
Basic common shares 11,484 11,747
Plus: Impact of stock
options 65 178
------- -------
Diluted common shares 11,549 11,925
======= =======
Diluted EPS $ .35 $ .29
======= =======
(E) In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended
by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133 - Amendment of
SFAS No. 133" (combined "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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000 AND APRIL 3, 1999
(Continued)
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement SFAS 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1999
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 of SFAS 133.
(F) The Securities and Exchange Commission released Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements on December 3,
1999. This SAB provides additional guidance on the accounting for revenue
recognition including both broad conceptual discussions as well as certain
industry-specific guidance. The Company is in the process of accumulating
the information necessary to quantify the potential impact of this new
guidance, if any.
(G) The Company has three reportable segments: the Residential Building
Products Segment; the Air Conditioning and Heating Products Segment; and
the Windows, Doors and Siding Products Segment. In the tables below, Other
includes corporate related items, results of insignificant operations,
intersegment eliminations and certain income and expense items not
allocated to reportable segments.
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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000 AND APRIL 3, 1999
(Continued)
Summarized financial information for the Company's reportable segments is
presented in the tables that follow for the three months ended April 1,
2000 and April 3, 1999:
Three Months Ended
April 1, April 3,
2000 1999
--------- --------
(Amounts in thousands)
(Unaudited)
Net Sales:
Residential building products $171,962 $154,294
Air conditioning and heating
products 127,646 116,434
Windows, doors and siding products 172,548 117,431
Other 19,351 18,541
-------- --------
Consolidated net sales $491,507 $406,700
======== ========
Operating Earnings (Loss):
Residential building products $ 25,066 $ 19,147
Air conditioning and heating
products 12,654 11,715
Windows, doors and siding products (4,553) (219)
Other, net (3,367) (3,026)
-------- --------
Consolidated operating earnings 29,800 27,617
Unallocated:
Interest expense (24,310) (23,966)
Investment income 1,910 2,849
-------- --------
Earnings before provision for
income taxes $ 7,400 $ 6,500
======== ========
Depreciation and Amortization:
Residential building products $ 5,559 $ 5,022
Air conditioning and heating
products 2,997 2,585
Windows, doors and siding products 6,614 4,949
Other 385 485
-------- --------
Consolidated depreciation and
amortization $ 15,555 $ 13,041
======== ========
(H) In March 2000, one of the trusts related to the Company's supplemental
retirement plans loaned funds to certain officers of the Company who have
fully vested retirement benefits in such plans. At April 1, 2000,
approximately $13,400,000 of notes receivable bearing interest at 6 3/4%
and maturing 2015 related to this transaction are included in Other Assets
in restricted investments and marketable securities in the accompanying
unaudited consolidated balance sheet.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000 AND APRIL 3, 1999
(Continued)
(I) Subsequent to the NuTone, Inc. ("NuTone") acquisition on July 31, 1998, the
Company has realized and expects to realize additional cost reductions
("NuTone Cost Reductions") as a result of integrating NuTone into the
Company's operations.
The Company's operating earnings for the three months ended April 1, 2000
include approximately $3,300,000 of net cost savings related to NuTone Cost
Reductions which are net of approximately $700,000 of related costs and
expenses. For the full year 1999, the Company's operating earnings included
approximately $14,000,000 of net cost savings related to NuTone Cost
Reductions which were net of approximately $3,400,000 of related costs and
expenses. The Company expects to realize future incremental net NuTone Cost
Reductions in excess of 1999 levels of approximately $6,000,000 to
$9,000,000 annually. Future NuTone Cost Reductions are estimates and actual
savings achieved could differ materially.
(J) The Company has recorded liabilities in connection with acquisitions
related to employee terminations and other exit costs associated with
management's plans to eliminate certain activities of acquired entities.
The Company has recorded liabilities of approximately $2,200,000 in the
three months ended April 1, 2000, which principally relate to the
termination of certain employees. As of April 1, 2000, plans for
eliminating certain activities have been finalized for all significant
acquisitions.
Charges to these liabilities for employee termination costs include
payroll, payroll taxes and insurance benefits related to severance
arrangements and were approximately $450,000 for the three months ended
April 1, 2000. Charges to the liabilities for other exit costs relate
principally to lease costs and other costs of 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 $60,000 for the three months ended April 1, 2000. At
April 1, 2000, liabilities in connection with acquisitions related to
employee terminations and other exit costs totaled approximately
$4,500,000.
In addition, for the three months ended April 1, 2000, the Company expensed
in the accompanying consolidated statement of operations approximately
$700,000 of costs related to the integration activities of NuTone into the
Company's operations.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment, the Air Conditioning and Heating Products Segment, and the
Windows, Doors and Siding Products Segment. In the results of operations
presented below, Other includes corporate related items, results of
insignificant operations and certain income and expense not allocable to
reportable segments. Through its principal segments, the Company manufactures
and sells, primarily in the United States, Canada and Europe, a wide variety of
products for the residential and commercial construction, manufactured housing,
the do-it-yourself ("DIY") and professional remodeling and renovation markets.
(As used in this report, the terms "Company" and "Nortek" refer to Nortek, Inc.,
together with its subsidiaries, unless the context indicates otherwise. Such
terms as "Company" and "Nortek" are used for convenience only and are not
intended as a precise description of any of the separate corporations, each of
which manages its own affairs.)
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, DIY and professional
remodeling and renovation markets. The principal products sold by the Segment
include, 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 systems
("HVAC") for custom-designed commercial applications and for manufactured and
site-built residential housing. The Windows, Doors and Siding Products Segment
principally manufactures and distributes vinyl, wood and composite windows,
vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting,
soffit and accessories, aluminum trim coil, siding, soffit and accessories,
blocks, vents, shutters, sunrooms, fencing, railing and decking for use in the
residential construction, DIY and professional renovation markets.
The Company acquired Webco, Inc. ("Webco") on March 8, 1999. On April 23, 1999,
the Company acquired three businesses from Caradon plc of the United Kingdom:
Peachtree Windows and Doors, Thermal-Gard and CWD Windows and Doors (the
"Caradon Acquired Companies"). Other 1999 acquisitions included Multiplex
Technologies, Inc. ("Multiplex") on May 28, 1999, Kroy Building Products, Inc.
("Kroy") on September 9, 1999 and Xantech Corporation ("Xantech") on December 3,
1999. These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the results of Webco, the Caradon Acquired Companies,
Multiplex, Kroy and Xantech are included in the Company's consolidated results
since the date of their acquisition.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Results of Operations
- ---------------------
The tables that follow present the unaudited net sales and operating earnings
for the Company's principal segments for the three months ended April 1, 2000
and April 3, 1999, and the dollar amount and percentage change of such results
as compared to the prior comparable period.
Change in
Three Months Ended First Quarter 2000
April 1, April 3, as Compared to 1999
2000 1999 $ %
------ ------ --------- ------
(Dollar amounts in thousands)
Net Sales:
- ----------
Residential building
products $171,962 $154,294 $17,668 11.5%
Air conditioning and
heating products 127,646 116,434 11,212 9.6
Windows, doors and
siding products 172,548 117,431 55,117 46.9
Other 19,351 18,541 810 4.4
-------- -------- ------
$491,507 $406,700 $84,807 20.9%
======== ======== =======
Change in
Three Months Ended First Quarter 2000
April 1, April 3, as Compared to 1999
2000 1999 $ %
------ ------ --------- ------
(Dollar amounts in thousands)
Operating Earnings:
- -------------------
Residential building
products $25,066 $19,147 $5,919 30.9%
Air conditioning and
heating products 12,654 11,715 939 8.0
Windows, doors and
siding products (4,553) (219) (4,334) (1,979.0)
Other (3,367) (3,026) (341) (11.3)
------- ------ ------
$29,800 $27,617 $2,183 7.9%
======= ======= ======
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(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 first quarter ended April 1, 2000 are not necessarily
indicative of the results of operations to be expected for any other interim
period or the full year.
Change in
First Quarter Ended First Quarter 2000
April 1, April 3, as Compared to 1999
2000 1999 $ %
-------- ------- -------- -------
(Dollar amounts in millions)
Net sales $491.5 $406.7 $84.8 20.9%
Cost of products sold 358.2 296.9 (61.3) (20.6)
Selling, general and
administrative expense 97.7 77.4 (20.3) (26.2)
Amortization of goodwill
and intangible assets 5.8 4.8 (1.0) (20.8)
------ ------ ------ -----
Operating earnings 29.8 27.6 2.2 8.0
Interest expense (24.3) (23.9) (0.4) (1.7)
Investment income 1.9 2.8 (0.9) (32.1)
------ ------ ------ -----
Earnings before provision
for income taxes 7.4 6.5 0.9 13.8
Provision for income taxes 3.4 3.0 (0.4) (13.3)
------ ------ ------ -----
Net earnings $ 4.0 $ 3.5 $ 0.5 14.3%
====== ====== ====== =====
Percentage of Net Sales Change in Percentage
First Quarter Ended for the First
April 1, April 3, Quarter 2000 as
2000 1999 as Compared to 1999
-------- ------- -------
Net sales 100.0% 100.0% ---%
Cost of products sold 72.9 73.0 0.1
Selling, general and
administrative expense 19.9 19.0 (0.9)
Amortization of goodwill
and intangible assets 1.2 1.2 ---
----- ----- -----
Operating earnings 6.0 6.8 (0.8)
Interest expense (4.9) (5.9) 1.0
Investment income 0.4 0.7 (0.3)
----- ----- ------
Earnings before provision
for income taxes 1.5 1.6 (0.1)
Provision for income taxes 0.7 0.7 ---
----- ----- -----
Net earnings 0.8% 0.9% (0.1)%
===== ===== =====
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Net sales increased approximately $84,800,000 or approximately 20.9% for the
first quarter of 2000, as compared to 1999 (or increased approximately
$86,700,000 or approximately 21.3% excluding the effect of changes in foreign
exchange rates). Net sales increased for the three months ended April 1, 2000 as
compared to the three months ended April 3, 1999 as a result of acquisitions and
higher sales volume. Acquisitions contributed approximately $57,500,000 of the
total increase in net sales. Net sales increased approximately $17,700,000 or
approximately 11.5% (or approximately $19,700,000 excluding the effect of
changes in foreign currency) in the first quarter of 2000 as compared to 1999 in
the Residential Building Products Segment principally as a result of
approximately $9,300,000 of sales from acquisitions and higher sales volume of
kitchen range hoods and bath fans. Net sales increased approximately $11,200,000
or 9.6% in the Air Conditioning and Heating Products Segment. The increase in
this 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 line with the softness in the manufactured
housing industry. Also, the 1999 acquisition of Webco, Inc. contributed
approximately $4,000,000 to the increase in net sales in the first quarter of
2000 in this Segment. It is anticipated that the weakness in the manufactured
housing industry will continue throughout the balance of the year and is
expected to continue to have an adverse effect on this Segment's sales as
compared to 1999. This Segment's sales of air conditioning and heating products
sold to manufactured housing customers should improve as the manufactured
housing industry takes steps to reduce its retail inventories of manufactured
homes. Net sales increased approximately $55,100,000 or 46.9%, in the Windows,
Doors and Siding Product Segment principally as a result of 1999 acquisitions
which contributed approximately $44,200,000 in the first quarter of 2000. The
increase in net sales in this Segment in the first quarter of 2000 also resulted
from increased sales prices and sales volume of vinyl siding and related
products and accessories.
Cost of products sold as a percentage of net sales decreased slightly from
approximately 73.0% in 1999 to approximately 72.9% in 2000. This decrease in the
percentage principally resulted from the effect of higher sales levels in the
Residential Building Products and the Air Conditioning and Heating Products
Segments without a proportionate increase in costs and reflects the effect of
acquisitions in both segments which have a lower cost of products sold as a
percentage of net sales than the overall group of businesses owned prior to the
acquisitions. These factors were partially offset in the Windows, Doors and
Siding Products Segment by the effect of acquisitions (which have a higher cost
of products sold as a percentage of net sales than the overall group of
businesses owned prior to the acquisitions) and higher vinyl resin cost, without
a proportionate increase in sales prices. The rising cost of vinyl resin is
expected to continue to adversely impact cost of sales percentages over the next
several quarters. This situation, however, should be mitigated as cost reduction
measures and additional price increases for this Segment's vinyl products are
implemented. 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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Selling, general and administrative expense as a percentage of net sales
increased from approximately 19.0% in the first quarter of 1999 to approximately
19.9% in the first quarter of 2000. The increase in the percentage is
principally as a result of the effect of 1999 acquisitions which have a higher
expense as a percentage of net sales than the overall group of businesses owned
prior to the acquisitions. Excluding the effect of acquisitions, selling,
general and administrative expense as a percentage of net sales decreased from
approximately 19.0% in 1999 to approximately 18.8% in 2000, in part, reflecting
expense reduction measures implemented, including lower expenses from the
intergration of acquisitions.
Amortization of goodwill and intangible assets, as a percentage of net sales,
remained unchanged at approximately 1.2% of net sales in the first quarter of
1999 and 2000.
Consolidated operating earnings increased approximately $2,200,000 from
approximately $27,600,000 in the first quarter of 1999 to approximately
$29,800,000 in 2000. Businesses acquired in 1999 decreased operating earnings by
approximately $600,000 which consisted of an increase of approximately $400,000
in the Residential Building Products Segment, an increase of approximately
$500,000 in the Air Conditioning and Heating Products Segment and a decrease of
approximately $1,500,000 in the Windows, Doors and Siding Products Segment. The
increase in operating earnings for the first quarter ended April 1, 2000 as
compared to the first quarter ended April 3, 1999 includes approximately
$3,300,000 of estimated synergies and cost reductions realized from the
integration of NuTone into the Company's Residential Building Products Segment,
net of approximately $700,000 of costs and expenses as compared to the first
quarter of 1999. Consolidated operating earnings have been reduced by
depreciation and amortization expense (other than amortization of deferred debt
expense and debt discount) of approximately $15,600,000 and $13,000,000 for the
first quarter ended April 1, 2000 and the first quarter ended April 3, 1999,
respectively. Businesses acquired contributed approximately $1,800,000 of the
increase in depreciation and amortization expense in the first quarter ended
April 1, 2000, of which approximately $400,000 was in the Residential Building
Products Segment, $100,000 was in the Air Conditioning and Heating Products
Segment and $1,300,000 was in the Windows, Doors and Siding Products Segment.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
The increase in operating earnings was also due, in part, to increased sales
volume without a proportionate increase in costs and expenses and NuTone Cost
Reductions in the Residential Building Products Segment of approximately
$5,500,000 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 $400,000 excluding
the contribution from acquisitions. The increase 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 by lower
operating earnings of air conditioning and heating products sold to the
manufactured housing market as compared to the first quarter ended April 3, 1999
due to a slowdown 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 during the next several quarters as compared
to 1999. It is anticipated that this Segment's operating earnings will begin to
improve from increased sales of air conditioning and heating products once the
manufactured housing 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
earnings from higher sales levels of site-built residential air conditioning
products. Operating earnings in the first quarter ended April 1, 2000 in the
Windows, Doors and Siding Products Segment decreased approximately $2,800,000
excluding the contribution from acquisitions. This decrease was principally as a
result of higher vinyl resin costs, partially offset by the effect of increased
sales prices and lower costs and expenses of certain window products. The
Company expects future operating earnings in this segment to be adversely
affected by higher vinyl resin costs until further increases in sales prices to
customers and cost reduction measures can be implemented.
Operating earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries which manufacture
built-in ventilation products and windows and doors, were approximately 6.2% and
4.0% of operating earnings (before corporate overhead) in the first quarter of
2000 and 1999, respectively. The increase in foreign operating earnings as a
percentage of net sales is principally as a result of the increased foreign
sales and operating earnings from acquisitions. Sales and earnings derived from
the international market are subject to the risks of currency fluctuations.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Interest expense in the first quarter of 2000 increased approximately $400,000
or approximately 1.7% as compared to 1999, primarily as a result of increased
debt acquired and issued in connection with 1999 acquisitions outstanding during
the quarter ended April 1, 2000 as compared to the quarter ended April 3, 1999.
Investment income in the first quarter of 2000 decreased approximately $900,000
or approximately 32.1% as compared to the first quarter of 1999, primarily due
to lower average invested balances as a result of funds used for acquisitions in
1999.
The provision for income taxes was approximately $3,400,000 for the first
quarter of 2000, as compared to approximately $3,000,000 for 1999. 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) and the effect of foreign income tax on
foreign source income.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged and expects to continue to be highly leveraged
for the foreseeable future. At April 1, 2000, the Company had consolidated debt
of approximately $1,036,868,000 consisting of (i) $14,730,000 of short-term
borrowings and current maturities of long-term debt, (ii) $126,667,000 of notes,
mortgage notes and other indebtedness, (iii) $209,331,000 of the 8 7/8% Senior
Notes due 2008 ("8 7/8% Notes"), (iv) $307,946,000 of the 9 1/8% Senior Notes
due 2007 ("9 1/8% Notes"), (v) $174,204,000 of the 9 1/4% Senior Notes due 2007
("9 1/4% Notes") and (vi) $203,990,000 of the 9 7/8% Senior Subordinated Notes
due 2004 ("9 7/8% Notes"). At April 1, 2000, the Company had consolidated
unrestricted cash, cash equivalents and marketable securities of approximately
$70,843,000 as compared to approximately $115,112,000 at December 31, 1999 and
the Company's debt to equity ratio remained unchanged at approximately 4.0:1 at
April 1, 2000 and December 31, 1999.
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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
The Company has evaluated and expects 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.
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 and the 9 7/8% Notes and a credit agreement for the Ply Gem
credit facility) contain restrictive financial and operating covenants including
covenants that restrict the ability of the Company and its subsidiaries to
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 2000 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.
The Company is in the process of integrating the recent acquisitions into its
businesses, and it has and expects to achieve incremental synergies, cost
savings and reductions during 2000, partially offset by certain costs and
expenses. Plans for eliminating certain activities have been finalized for all
significant acquisitions. The total future expenditures associated with exit
costs related to the integration effort are expected to be funded from the
Company's operating cash flow. The integration of the acquisitions within the
Windows, Doors and Siding Products Segment is taking longer than originally
planned. If significant difficulty is encountered with the integration of
acquisitions within the Windows, Doors and Siding Products Segment or
acquisitions within other Segments, 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 recent
acquisitions. (See Notes I and J of the Notes to the Unaudited Condensed
Consolidated Financial Statements included elsewhere herein.)
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Unrestricted cash and cash equivalents decreased from approximately $80,893,000
at December 31, 1999 to approximately $66,843,000 at April 1, 2000. Marketable
securities available for sale decreased from approximately $34,219,000 at
December 31, 1999 to approximately $4,000,000 at April 1, 2000. The Company's
investment in marketable securities at April 1, 2000 consisted of commercial
paper. At April 1, 2000, approximately $10,933,000 of the Company's cash and
investments was pledged as collateral for insurance and other requirements and
were classified as restricted in current assets in the Company's accompanying
consolidated balance sheet.
Capital expenditures were approximately $7,667,000 in the first quarter of 2000
compared to approximately $11,772,000 in the first quarter of 1999. Capital
expenditures were approximately $42,000,000 for the year ended December 31, 1999
and are expected to range between approximately $50,000,000 and $55,000,000 in
2000.
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
programs were announced on May 4, 2000 to purchase up to 1,000,000 shares of the
Company's Common and Special Common Stock and on May 20, 1999 to purchase up to
500,000 shares of the Company's Common and Special Common Stock. Both programs
allow for purchases in open market or negotiated transactions, subject to market
conditions, cash availability and provisions of the Company's outstanding debt
instruments. As of May 4, 2000, all 500,000 shares of the Company's Common and
Special Common Stock authorized by the May 20, 1999 program have been purchased
for approximately $13,300,000 and such share purchases were accounted for as
Treasury Stock. There have been no purchases under the May 4, 2000 program.
At April 28, 2000, approximately $86,900,000 was available for the payment of
cash dividends, stock payments or other restricted payments as defined under the
terms of the Company's most restrictive indenture. (See Note C of the Notes to
the Unaudited Condensed Consolidated Financial Statements included elsewhere
herein.)
The Company's working capital increased slightly from approximately $324,492,000
at December 31, 1999 to approximately $334,153,000 at April 1, 2000 and its
current ratio remained unchanged at 1.9:1 between December 31, 1999 and April 1,
2000.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Accounts receivable increased approximately $27,483,000 or approximately 11.3%,
between December 31, 1999 and April 1, 2000, while net sales increased
approximately $2,968,000 or approximately 0.6% in the first quarter of 2000 as
compared to the fourth quarter 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 April 1, 2000
as compared to December 31, 1999. The Company has not experienced any
significant overall changes in credit terms, collection efforts, credit
utilization or delinquency in accounts receivable in 2000.
Inventories increased approximately $38,651,000 or approximately 18.2%, between
December 31, 1999 and April 1, 2000. The increase in inventories is primarily a
result of expanded distribution of HVAC residential site-built products by the
Company's Air Conditioning and Heating Products Segment and planned increases
within the Windows, Doors and Sidings Product Segment to meet anticipated higher
demand within the second quarter of 2000.
Accounts payable increased approximately $43,551,000 or approximately 29.1%,
between December 31, 1999 and April 1, 2000. The increase in accounts payable is
primarily the result of increased inventory levels as discussed above.
<PAGE>
Unrestricted cash and cash equivalents decreased approximately $14,050,000 from
December 31, 1999 to April 1, 2000, principally as a result of the following:
Condensed
Consolidated
Cash Flows(*)
-------------
Operating Activities--
Cash flow from operations, net $ 20,540,000
Increase in accounts receivable, net (28,675,000)
Increase in inventories (39,456,000)
Increase in prepaids and other current assets (3,926,000)
Increase in accounts payable 44,622,000
Decrease in accrued expenses and taxes (30,392,000)
Investing Activities---
Proceeds from the sale of investments and
marketable securities, net 30,435,000
Capital expenditures (7,667,000)
Financing Activities---
Purchase of Nortek Common and Special
Common Stock (1,029,000)
Other, net 1,498,000
-------------
$(14,050,000)
============
(*) Prepared from the Company's Consolidated Statement of Cash Flows for the
three months ended April 1, 2000. (See Nortek, Inc. and Subsidiaries Unaudited
Condensed Consolidated Financial Statements included elsewhere herein.)
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 remained unchanged at approximately 4.0:1 at
December 31, 1999 and April 1, 2000, primarily as a result of the increase in
equity due to net earnings for the first quarter of 2000, offset by the effect
of the purchase of Nortek Common and Special Common Stock and changes in
currency translation. (See the Consolidated Statement of Stockholders'
Investment included elsewhere herein.)
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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
The Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth quarters. Since a high
percentage of the Company's manufacturing overhead and operating expenses are
relatively fixed throughout the year, operating income and net earnings tend to
be lower in quarters with lower sales levels. As a result of the recent
acquisitions in the Windows, Doors and Siding Segment, the performance of this
Segment 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 on a limited basis to hedge
economic exposures. The Company does not enter into derivative financial
instruments or other financial instruments for trading purposes.
There have been no significant changes in market risk from the December 31, 1999
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.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
The Company's investing strategy, to manage interest rate exposure, is to invest
in short-term, highly liquid investments and marketable securities. Short-term
investments primarily consist of money market accounts 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 an interest rate collar transaction to lock in the
interest rate between a floor of 5.76% and a cap of 7%.
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. In the
first quarter of 2000, 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 April 1, 2000, the Company did not have any
outstanding foreign currency hedging contracts.
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. See the discussion elsewhere herein under Managements
Discussion and Analysis of Financial Condition and Results of Operations, with
respect to the recent increase in the cost of resin material in the Company's
Windows, Doors and Siding Products Segment. The Company generally does not enter
into derivative financial instruments to manage commodity-pricing exposure. At
April 1, 2000, the Company did not have any outstanding commodity forward
contracts.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
Year 2000 Disclosure
- --------------------
The following Year 2000 statements constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
As of May 15, 2000, none of the Company's subsidiaries had experienced any
significant Year 2000 related problems. There have been no instances where
mission-critical and non-mission-critical systems have failed to perform
correctly. However, the Year 2000 issue still poses several potential risks to
the Company and its subsidiaries. A number of the Company's customers and
suppliers (third parties) utilize computers and computer software to varying
degrees in conjunction with the operation of their businesses. The customers and
suppliers of those businesses may utilize computers as well. Should the
Company's customers and suppliers, or the businesses on which they depend
experience any Year 2000 related computer problems, such third parties' cash
flow could be disrupted, adversely affecting their ability to pay the Company,
if a customer, or, if a supplier, their ability to pay their suppliers for goods
needed to supply the Company. Such disruptions could have adverse effects on the
Company and its subsidiaries. The Company assessed its Year 2000 third party
exposure through the use of questionnaires and personal interviews during 1999.
As of May 15, 2000, the Company was not aware of any supply or credit problems
related to the Year 2000 issue.
Should Year 2000 related problems occur which cause any of the systems of
certain third parties upon which the Company and its subsidiaries depends to
become inoperative, increased personnel costs could be incurred if additional
staff is required to perform functions that the inoperative systems would have
otherwise performed. As of May 15, 2000, the Company had not experienced any
disruptions of third party services related to the Year 2000 issue.
The Company's expenditures for remediation directly related to correcting Year
2000 issues were approximately $6,000,000, including businesses acquired in
1999. The total expenditures of approximately $6,000,000 consisted 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. All of the Company's Year
2000 compliance expenditures have been funded from the Company's operating cash
flow.
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED APRIL 1, 2000
AND THE FIRST QUARTER ENDED APRIL 3, 1999
(Continued)
The Company's Year 2000 compliance budget did 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 Year 2000 compliance budget did not require the diversion of funds
from or the postponement of the implementation of other planned IT projects.
The Company believes it is not possible to estimate the potential lost revenue
due to the remaining potential Year 2000 problems discussed above as the
occurrence, extent and longevity of such potential problems cannot be predicted.
As of May 15, 2000 the Company believes that it has not experienced any lost
revenue related to the Year 2000 issue.
Forward-Looking Statements
- --------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this discussion
and throughout this document, words, such as "intends," "plans," "estimates,"
"believes," "anticipates" and "expects" or similar expressions are intended to
identify forward-looking statements. These statements are based on the Company's
current plans and expectations and involve risks and uncertainties, over which
the Company has no control, that could cause actual future activities and
results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and operating results to differ include the availability and cost of
certain raw materials costs, (including, among others, steel, copper, packaging
materials, plastics resins, glass, wood and aluminum) and purchased components,
the level of domestic and foreign construction and remodeling activity affecting
residential and commercial markets, interest rates, employment, inflation, Y2K
readiness, currency translation, consumer spending levels, operating in
international economies, the rate of sales growth, price, and product and
warranty liability claims. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Readers are also urged to carefully
review and consider the various disclosures made by the Company, in this
document, as well as the Company's periodic reports on Forms 10-K, 10-Q and 8-K,
filed with the Securities and Exchange Commission ("SEC").
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Second Amendment dated March 3, 2000 to Nortek Inc.
Supplemental Executive Retirement Plan dated July 1, 1997
(filed herewith).
10.2 Amendment No. 1 effective February 3, 2000 to Nortek
Inc. 1999 Equity and Cash Incentive Plan (filed
herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the
period.
<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
May 16, 2000
- ------------
(Date)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> APR-01-2000
<CASH> 66,843
<SECURITIES> 14,933
<RECEIVABLES> 283,313
<ALLOWANCES> 12,067
<INVENTORY> 251,329
<CURRENT-ASSETS> 701,849
<PP&E> 496,264
<DEPRECIATION> 171,513
<TOTAL-ASSETS> 1,824,869
<CURRENT-LIABILITIES> 367,696
<BONDS> 1,022,138
0
0
<COMMON> 19,580
<OTHER-SE> 242,049
<TOTAL-LIABILITY-AND-EQUITY> 1,824,869
<SALES> 491,507
<TOTAL-REVENUES> 491,507
<CGS> 461,707
<TOTAL-COSTS> 461,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,310
<INCOME-PRETAX> 7,400
<INCOME-TAX> 3,400
<INCOME-CONTINUING> 4,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,000
<EPS-BASIC> .35
<EPS-DILUTED> .35
</TABLE>
Exhibit 10.1
SECOND AMENDMENT TO THE NORTEK, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Nortek, Inc. (the "Company") adopted the Nortek, Inc.
Supplemental Executive Retirement Plan (the "Plan") effective January 1,
1996; and
WHEREAS, the Plan provides that the Board may, from time to time,
amend said Plan provided that such amendment does not reduce the accrued
benefit of any participant.
NOW, THEREFORE, effective as of the date of this Amendment, the Plan
is hereby amended and revised to read as follows:
1. Section 2.2 is amended to read as follows:
"2.2. "Average Compensation" means a Participant's average annual
total compensation from all Employers during his three consecutive calendar
years as an Employee in which such compensation was greatest. For this
purpose, "Compensation" shall mean the Participant's taxable compensation
as reported on Form W-2."
2. Section 6.1 is amended to read as follows:
"6.1. Vesting and Commencement of Benefits. In the event of "Change of
Control" a Participant shall, notwithstanding any other provision of the
Plan, be fully vested in his retirement benefit and the Participant shall
be paid, immediately after the Change of Control and regardless of age, a
lump sum payment equal to the present value (computed using the actuarial
assumptions stated in Schedule D) of the unreduced retirement benefit that
would be payable to the Participant at Normal Retirement Age."
3. Sections 6.2 entitled "Qualified Termination" and 6.3 entitled
"Reduced Payment in the Event of Excise Tax" are hereby deleted and
Section 6.4 entitled "Reduced Payment in the Event of Increases in
Basic Plan Benefit" is hereby designated as paragraph 6.2.
4. A new Section 6.3 entitled "Gross Up of Payment in Event of Excise
Tax" is hereby added:
"6.3 In the event that any payments made under this Plan (the
"Payments") are subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then the Company shall pay to the Participant an
additional amount ("Gross Up") such that the net amount retained by the
Participant after deduction of any Excise Tax on the Payments and any
Federal and State income taxes and Excise Tax upon the Gross Up shall be
equal to the Payments. For purposes of determining the amount of the Gross
Up, the Participant shall be deemed to pay Federal and State income taxes
at the highest marginal rate of taxation in the calendar year in which the
Payment is to be made. The determination of whether such Excise Tax is
payable and the amount thereof shall be based upon the opinion of tax
counsel selected by the Company. If such opinion is not finally accepted by
the IRS upon audit, then appropriate adjustments shall be computed (without
interest but with Gross Up, if applicable) by such tax counsel based upon
the final amount of the Excise Tax so determined. The amount shall be paid
by the appropriate party in one lump cash sum within 30 days of such
computation.
5. Section 5.5 entitled "Other Benefits" is hereby amended to read as
follows:
"Section 5.5. Lump-Sum Payments and Other Benefits. Except as
otherwise provided in Article VI, the benefit with respect to a Participant
who ceases to be an Employee for any reason other than Retirement with the
consent of the Company, Disability or death, may not commence prior to his
Normal Retirement Date. However, at the time that a benefit would otherwise
commence under this Article V, the Administrator, in its sole discretion,
but only upon the written request of a Plan Participant or Spouse, may
authorize the payment of benefits in the form of a single lump-sum payment
equal to the then present value of the Participant's accrued benefit under
the Plan as computed using the actuarial assumptions stated in Schedule D
hereto."
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be
executed this 3rd day of March, 2000.
NORTEK, INC.
By:/s/ Richard J. Harris
Exhibit 10.2
Amendment No. 1 to
Nortek, Inc. 1999 Equity and Cash Incentive Plan
Effective Date: February 3, 2000
1. The second paragraph of Section 4 of the Nortek, Inc. 1999 Equity and
Cash Incentive Plan (the "1999 Plan") is hereby deleted and replaced with
the following paragraph:
"Subject to Section 8.6(a), the maximum number of shares of Stock as
to which Options or Stock Appreciation Rights may be granted to any
Participant in any one calendar year under the Plan is 300,000, which
limitation shall be construed and applied consistently with the rules
under Section 162(m) of the Code."
2. The last two sentences of Section 6.5(c) of the Nortek, Inc. 1999 Equity
and Cash Incentive Plan are hereby deleted and replaced with the following
sentences:
"The maximum Exempt Award payable to any Participant in respect of all
such Performance Goals for any year under the Plan shall not exceed
$10,000,000. Payment of Exempt Awards based upon a Performance Goal
for calendar years 2005 and thereafter is conditioned upon reapproval
by Employer's shareholders no later than Employer's first meeting of
shareholders in 2004."
