<Page >
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(XX) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period ended February 28, 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 number 1-8831
FEDDERS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2572390
(State of incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 908/604-8686
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 registrant has outstanding 16,412,859 shares of Common Stock, 17,899,336
shares of Class A Stock (which is immediately convertible into Common Stock on
a share-for-share basis upon conversion of all of the Class B Stock) and
2,266,606 shares of Class B Stock (which is immediately convertible into Common
Stock on a share-for-share basis) as of March 31, 1999.
<Page 2>
FEDDERS CORPORATION
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4-5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
<Page 3>
PART I FINANCIAL INFORMATION
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
FEB. 28, FEB. 28, FEB. 28, FEB 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales and other income $ 58,887 $ 33,580 $ 84,589 $ 59,071
Cost of sales 46,001 26,439 65,111 47,197
Selling, general and
administrative expense 9,590 8,990 18,560 18,025
Restructuring charge - 16,750 - 16,750
55,591 52,179 83,671 81,972
Operating income (loss) 3,296 (18,599) 918 (22,901)
Partner's net interest in
joint venture results 704 132 605 227
Net interest expense (2,750) (2,350) (4,777) (4,186)
Income (loss) before income
taxes 1,250 (20,817) (3,254) (26,860)
Federal, state and foreign
income taxes (benefit) 435 (7,289) (1,134) (9,401)
Net income (loss) $ 815 $(13,528) (2,120) $(17,459)
Earnings (loss) per share $0.02 $(0.32) $(0.06) $(0.42)
Dividends per share declared:
Common $0.0250 $0.020 $0.050 $0.040
Class A 0.0250 0.020 0.050 0.040
Class B 0.0225 0.018 0.045 0.036
</TABLE>
See accompanying notes
<Page 4>
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION> February 28, August 31, February 28,
1999 1998 1998
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 5,439 $ 90,986 $ 13,977
Accounts receivable (less
allowance of $2,198, $2,032,
and $1,260 at February 28, 1999,
August 31, 1998 and
February 28, 1998, respectively) 41,193 14,520 22,043
Inventories:
Finished goods 61,039 25,553 85,432
Work in process 5,658 4,132 5,622
Raw materials and supplies 32,255 22,576 26,311
98,952 52,261 117,365
Deferred tax benefit 5,902 5,902 4,070
Prepaid expenses 3,836 4,308 8,673
Total current assets 155,322 167,977 166,128
Property, plant and equipment
at cost:
Land and improvements 2,994 2,994 3,703
Buildings 22,463 22,326 24,029
Machinery and equipment 82,201 79,454 72,040
Machinery and equipment under
capital lease 8,647 8,647 8,945
116,305 113,421 108,717
Less accumulated depreciation 60,011 57,103 52,405
56,294 56,318 56,312
Deferred income taxes 8,838 8,838 6,374
Goodwill 54,308 55,159 56,008
Other assets 16,217 16,337 7,735
$290,979 $304,629 $292,557
</TABLE>
See accompanying notes
<Page 5>
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share data) (unaudited)
<TABLE>
<CAPTION>
February 28, August 31, February 28,
1999 1998 1998
<S> <C> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term borrowing $ 18,516 $ - $ -
Current portion of long-term debt 2,780 2,065 1,963
Accounts payable 25,249 25,769 24,798
Income taxes payable 13,232 14,406 3,416
Accrued expenses 19,647 32,101 25,859
Total current liabilities 79,424 74,341 56,036
Long-term debt 107,260 108,948 110,623
Other long-term liabilities 9,844 11,911 11,043
Minority interest in joint venture 4,032 4,637 4,813
Stockholders' equity:
(all classes $1 par value):
Common Stock,
80,000 shares authorized,
16,347, 16,972 and 18,779 issued
at February 28, 1999; August 31,
1998 and February 28, 1998,
respectively 16,347 16,972 18,779
Class A Stock,
60,000 shares authorized,
19,436; 19,381 and 28,689
issued at February 28, 1999;
August 31, 1998 and February
28, 1998, respectively 19,436 19,381 28,689
Class B Stock,
7,500 shares authorized,
2,267 issued at February 28,
1999; August 31, 1998 and
February 28, 1998, respectively 2,267 2,267 2,267
Additional paid-in capital 29,276 31,619 88,600
Retained earnings 31,590 36,496 17,021
Cumulative translation adjustment (419) (430) (265)
98,497 106,305 155,091
Less: Treasury stock, at cost,
1,402 and 7,775 shares at
February 28, 1999 and February
28,1998, respectively (6,709) - (45,049)
Deferred compensation (1,369) (1,513) -
Total stockholders' equity 90,419 104,792 110,042
$290,979 $304,629 $292,557
</TABLE>
See accompanying notes
<Page 6>
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEB. 28, FEB. 28,
1999 1998
<S> <C> <C>
Cash flows from operations:
Net loss $ (2,120) $(17,459)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 4,841 4,532
Restructuring charge:
Provision for facility closing - 11,160
Write-off of long-lived assets - 5,590
Changes in operating assets and liabilities:
Accounts receivable (26,673) (12,983)
Inventories (46,691) (55,178)
Other current assets 665 244
Other assets (361) (1,335)
Accounts payable (520) 14,207
Accrued expenses (12,704) (15,324)
Income tax payable (1,174) (6,611)
Other long-term liabilities (1,821) (164)
Other 159 (127)
Net cash used in operations (86,399) (73,445)
Cash flows from investing activities:
Additions to property, plant and equipment (4,159) (3,744)
Disposals of property, plant and equipment - 1,032
Partners' net interest in joint
venture results (605) (227)
Net cash used in investing activities (4,764) (2,939)
Cash flows from financing activities:
Increase in short-term borrowing 18,516 -
Repayments of long-term debt (492) (2,818)
Proceeds from stock options exercised 141 1,276
Repurchase of capital stock (9,763) (16,791)
Cash dividends (2,786) (1,699)
Net cash provided by (used in)
financing activities 5,616 (20,032)
Net decrease in cash and cash equivalents (85,547) (96,416)
Cash and cash equivalents at beginning of period 90,986 110,393
Cash and cash equivalents at end of period $ 5,439 $ 13,977
Supplemental disclosure:
Interest paid $ 5,046 $ 5,488
Net income taxes paid (refunded) 1,041 (2,970)
</TABLE>
See accompanying notes
<Page 7>
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A. The financial information included herein is unaudited and prepared in
accordance with the instructions for Form 10-Q; however, such information
reflects all adjustments, which consist solely of normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods. Reference should be made to the annual
financial statements, including footnotes thereto, included in Fedders
Corporation's (the "Company") Annual Report on Form 10-K for the fiscal year
ended August 31, 1998. The Company's business is seasonal, and consequently,
operating results for the three-month and six month periods ending February 28,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending August 31, 1999. Certain prior year amounts have been re-
classified to conform with the current year presentation.
B. In July 1997, the Company announced that it had been authorized to
repurchase up to $50 million of outstanding stock. Under this plan, in the
first six months of fiscal 1998, the Company purchased approximately 2.9 million
shares of Common, Class A, and Preferred Stock for $16.8 million or $5.81 per
share. Total repurchases under this plan which were complete by August 1998
amounted to approximately 8.4 million shares of Common, Class A and Preferred
Stock for $50.1 million or 5.95 per share.
In August 1998, the Company announced that it had been authorized to repurchase
up to an additional $30 million of outstanding stock. Under this plan, in the
first six months of fiscal 1999, the Company repurchased approximately 2.0
million shares of Common and Class A Stock for $9.8 million, or $4.82 per share.
C. In the second quarter of 1999 and 1998, net income (loss) per share was
computed using the weighted average number of shares of Common, Class A and
Class B Stock outstanding, which amounted to approximately 36,820,000 and
41,944,000 shares respectively. Options on approximately 131,000 shares of
capital stock were included in computing diluted earnings per share in the 1999
quarter. Diluted earnings per share equaled basic earnings per share in the
current year's quarter. In the prior year period, options on approximately
1,650,000 shares of capital stock were not included in computing diluted
earnings per share, since these options had no effect on such computation.
<Page 8>
In the first six months of 1999 and 1998, net loss per share was computed using
the weighted average number of shares outstanding, which amounted to
approximately 37,271,000 and 41,870,000 shares, respectively. Due to the net
loss in both periods, options on approximately 99,000 and 1,724,000 shares of
Class A Stock, respectively, were not included in computing diluted earnings
per share.
D. In January 1998, the Company announced a plan to restructure its operations,
which resulted in the Company recording a one-time expense totaling $16.8
million in the second fiscal quarter of 1998. At February 28, 1999, the
restructuring reserve balance was approximately $3.2 million and consisted
principally of amounts for termination of various equipment and facility leases.
E. The Company adopted Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income", on September 1, 1998. This statement
established standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Comprehensive income of the Company is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) $ 815 $(13,528) $ (2,120) $(17,459)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustment (174) (539) (272) (573)
Comprehensive income (loss) $ 641 $(14,067) $ (2,392) $(18,032)
</TABLE>
F. The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This standard supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise" and establishes standards for
the way that public companies report information about operating segments and
standards for disclosures regarding products and services, geographic areas and
major customers. As permitted by SFAS 131, the Company will not apply this
statement to interim periods in the initial year of adoption. Results of
operations and financialposition will be unaffected by implementation of this
standard.
<Page 9>
In February 1998, the FASB issued SFAS 132 "Employees Disclosures About Pensions
and Other Post-Retirement Benefits" - an Amendment of SFAS 87, 88 and 106, which
revises disclosure about pension and other post-retirement benefits. The
statement is effective for the Company's financial statements for the fiscal
year ending August 31, 1999. The Company does not expect this statement to have
a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting For Derivative Instruments
and Hedging Activities." This statement is effective for fiscal years beginning
after June 15, 1999. The Company does not expect this statement to have a
material impact on the Company's financial statements.
G. In August 1997, Fedders North America, Inc. ("FNA"), a subsidiary of the
Company, issued $100 million principal amount of 9 3/8% Senior Subordinated
Notes due in 2007. The Notes are guaranteed by the Company on a senior
subordinated basis. The following condensed consolidating financial statements
present separate information for FNA (including its subsidiaries) and the
Company and its subsidiaries, other than FNA. The subsidiaries of the Company
other than FNA (including its subsidiaries) are inconsequential, individually
and in the aggregate, to the consolidated financial statements and management
has determined that separate financial statements of the Company would not be
meaningful.
<Page 10>
G. Continued
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION> For the Three Months Ended
February 28, 1999
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net sales $ 54,543 $ 4,344 $ 58,887
Cost of sales 46,428 (427) 46,001
Selling, general and
administrative expense (1) 3,978 5,612 9,590
Operating income (loss) 4,137 (841) 3,296
Partner's net interest in
joint venture results - 704 704
Net interest expense (2) (2,630) (120) (2,750)
Income (loss) before income
taxes 1,507 (257) 1,250
Income taxes (benefit) 527 (92) 435
Net income (loss) $ 980 $ (165) $ 815
For the Three Months Ended
February 28, 1998
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net sales $ 27,274 $ 6,306 $ 33,580
Cost of sales 19,969 6,470 26,439
Selling, general and
administrative expense (1) 5,865 3,125 8,990
Restructuring charge 14,488 2,262 16,750
Operating loss (13,048) (5,551) (18,599)
Partner's net interest in
joint venture results - 132 132
Net interest income
(expense) (2) (2,616) 266 (2,350)
Loss before income taxes (15,664) (5,153) (20,817)
Income tax benefit (5,482) (1,807) (7,289)
Net loss $(10,182) $ (3,346) $(13,528)
</TABLE>
See accompanying notes
<Page 11>
G. Continued
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION> For the Six Months Ended
February 28, 1999
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net sales $ 72,721 $ 11,868 $ 84,589
Cost of sales 59,467 5,644 65,111
Selling, general and
administrative expense (1) 7,479 11,081 18,560
Operating income (loss) 5,775 (4,857) 918
Partner's net interest in
joint venture results - 605 605
Net interest income
(expense) (2) (5,220) 443 (4,777)
Income (loss) before income
taxes 555 (3,809) (3,254)
Income taxes (benefit) 194 (1,328) (1,134)
Net income (loss) $ 361 $ (2,481) $ (2,120)
For the Six Months Ended
February 28, 1998
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net sales $ 44,938 $ 14,133 $ 59,071
Cost of sales 35,234 11,963 47,197
Selling, general and
administrative expense (1) 12,210 5,815 18,025
Restructuring charge 14,488 2,262 16,750
Operating loss (16,994) (5,907) (22,901)
Partner's net interest in
joint venture results - 227 227
Net interest income
(expense) (2) (5,244) 1,058 (4,186)
Loss before income taxes (22,238) (4,622) (26,860)
Income tax benefit (7,783) (1,618) (9,401)
Net loss $(14,455) $ (3,004) $(17,459)
</TABLE>
See accompanying notes
<Page 12>
G. Continued
Condensed Consolidating Balance Sheets(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION> February 28, 1999
Fedders Other Eliminating Fedders
North America Fedders Entries Corporation
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ - $ 5,439 $ $ 5,439
Accounts receivable, net 37,908 3,285 41,193
Inventories 83,172 15,780 98,952
Other current assets 6,761 2,977 9,738
Total current assets 127,841 27,481 155,322
Investment in subsidiaries - 104,306 (104,306) -
Property, plant and
equipment, net 45,213 11,081 56,294
Goodwill 48,166 6,142 54,308
Other long-term assets 7,167 17,888 25,055
$228,387 $166,898 $(104,306) $290,979
Liabilities and stockholders' Equity
Current liabilities:
Short-term borrowing $ 18,516 $ - $ $ 18,516
Current portion of long-
term debt 1,811 969 2,780
Accounts and income taxes
payable 38,436 45 38,481
Accrued expenses 19,610 37 19,647
Total current liabilities 78,373 1,051 - 79,424
Net due to (from)affiliates 14,441 (14,441) -
Long-term debt 104,609 2,651 107,260
Other long-term liabilities 2,453 11,423 13,876
Stockholders' equity:
Common, Class A and Class B
Stock 5 38,050 (5) 38,050
Paid-in capital 21,292 181,203 (173,219) 29,276
Retained earnings (deficit) 7,589 (44,917) 68,918 31,590
Treasury stock - (6,709) (6,709)
Deferred compensation - (1,369) (1,369)
Cumulative translation
adjustment (375) (44) (419)
Total stockholders' equity 28,511 166,214 (104,306) 90,419
$228,387 $166,898 $(104,306) $290,979
</TABLE>
See accompanying notes
<Page 13>
G. Continued
Condensed Consolidating Balance Sheets (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION> August 31, 1998
Fedders Other Eliminating Fedders
North America Fedders Entries Corporation
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ - $ 90,986 $ $ 90,986
Accounts receivable, net 11,328 3,192 14,520
Inventories 39,335 12,926 52,261
Other current assets 6,952 3,258 10,210
Total current assets 57,615 110,362 167,977
Investment in subsidiaries - 104,306 (104,306) -
Property, plant and
equipment, net 45,446 10,872 56,318
Goodwill 48,873 6,286 55,159
Other long-term assets 7,460 17,715 25,175
$159,394 $249,541 $(104,306) $304,629
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-
term debt $ 2,060 $ 5 $ $ 2,065
Accounts and income tax
payable 38,773 1,402 40,175
Accrued expenses 28,571 3,530 32,101
Total current liabilities 69,404 4,937 - 74,341
Net due to(from)affiliates (46,905) 46,905 -
Long-term debt 105,334 3,614 108,948
Other long-term liabilities 3,391 13,157 16,548
Stockholders' equity:
Common, Class A and Class B
Stock 5 38,620 (5) 38,620
Paid-in capital 21,292 183,546 (173,219) 31,619
Retained earnings (deficit) 7,231 (39,653) 68,918 36,496
Deferred compensation - (1,513) (1,513)
Cumulative translation
adjustment (358) (72) (430)
Total stockholders' equity 28,170 180,928 (104,306) 104,792
$159,394 $249,541 $(104,306) $304,629
</TABLE>
See accompanying notes
<Page 14>
G. Continued
Condensed Consolidating Balance Sheets(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION> February 28, 1998
Fedders Other Eliminating Fedders
North America Fedders Entries Corporation
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ - $ 13,977 $ $ 13,977
Accounts receivable, net 19,408 2,635 22,043
Inventories 102,357 15,008 117,365
Other current assets 687 12,056 12,743
Total current assets 122,452 43,676 - 166,128
Investment in subsidiaries - 104,306 (104,306) -
Property, plant and
equipment, net 45,228 11,084 56,312
Goodwill 49,578 6,430 56,008
Other long-term assets 3,843 10,266 14,109
$221,101 $175,762 $(104,306) $292,557
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-
term debt $ 1,946 $ 17 $ $ 1,963
Accounts and income taxes
payable 23,697 4,517 28,214
Accrued expenses 21,646 4,213 25,859
Total current liabilities 47,289 8,747 56,036
Net due to (from) affiliates 57,925 (57,925) -
Long-term debt 106,407 4,216 110,623
Other long-term liabilities 2,793 13,063 15,856
Stockholders' equity:
Common, Class A and Class B
Stock 5 49,735 (5) 49,735
Paid-in capital 21,292 240,527 (173,219) 88,600
Retained earnings (deficit)(14,455) (37,442) 68,918 17,021
Treasury stock - (45,049) (45,049)
Cumulative translation
adjustment (155) (110) (265)
Total stockholders' equity 6,687 207,661 (104,306) 110,042
$221,101 $175,762 $(104,306) $292,557
</TABLE>
See accompanying notes
<Page 15>
G. Continued
Condensed Consolidating Statements of Cash Flows (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
February 28, 1999
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net cash used in operations $(75,594) $(10,805) $(86,399)
Net disposals of property, plant,
and equipment, being cash used
in investing activities (3,294) (1,470) (4,764)
Net repayments of short-and long-
term borrowing 17,542 482 18,024
Cash dividends - (2,786) (2,786)
Proceeds from stock options
exercised - 141 141
Repurchase of capital stock - (9,763) (9,763)
Change in net due to (from)
affiliate 55,332 (55,332) -
Net cash provided by (used in)
financing activities 72,874 (67,258) 5,616
Net decrease in cash and cash
equivalents (6,014) (79,533) (85,547)
Cash and cash equivalents at
beginning of year 6,014 84,972 90,986
Cash and cash equivalents at
end of period $ - $ 5,439 $ 5,439
</TABLE>
See accompanying notes
<Page 16>
G. Continued
Condensed Consolidating Statements of Cash Flows (unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
February 28, 1998
Fedders Other Fedders
North America Fedders Corporation
<S> <C> <C> <C>
Net cash provided by (used in)
operations $(76,825) $ 3,380 $ (73,445)
Net disposals of property, plant,
and equipment, being cash used
in investing activities (2,732) (207) (2,939)
Net repayments of short-and long-
term borrowing (863) (1,955) (2,818)
Cash dividends - (1,699) (1,699)
Proceeds from stock options
exercised - 1,276 1,276
Repurchase of capital stock - (16,791) (16,791)
Change in net due to (from)
affiliate 80,420 (80,420) -
Net cash provided by (used in)
financing activities 79,557 (99,589) (20,032)
Net decrease in cash and cash
equivalents - (96,416) (96,416)
Cash and cash equivalents at
beginning of year - 110,393 110,393
Cash and cash equivalents at
end of period $ - $ 13,977 $ 13,977
</TABLE>
See accompanying notes
<Page 17>
G. Continued
Intercompany transactions
The historical condensed consolidating financial statements presented above
include the following transactions between the Company and FNA.
1) The Company charges corporate overhead essentially on a cost basis
allocated in proportion to sales. Such charges to FNA amounted to approximately
$3.0 million and $3.6 million for the three months ended February 28, 1999, and
1998, respectively. Such charges to FNA amounted to approximately $4.6 million
and $5.0 million for the six months ended February 28, 1999 and 1998,
respectively.
2) FNA's interest expense reflects actual interest charges on the 9-3/8%
Senior Subordinated Notes due 2007, a revolving line of credit, a promissory
note and capital lease obligations.
3) FNA's depreciation and amortization for the three months ended February 28,
1999 and 1998 amounted to approximately $1.9 million and $1.5 million,
respectively. For the six months ended February 28, 1999 and 1998 such costs
amounted to approximately $3.8 million and $3.6 million, respectively. Capital
expenditures of FNA for the three-month period amounted to $1.0 million and $2.7
million, respectively. For the six-month period such expenditures amounted to
approximately $3.3 million and $1.5 million, respectively.
<Page 18>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The following is management's discussion and analysis of certain significant
factors which affected the Company's financial position and operating results
during the periods included in the accompanying consolidated financial
statements.
Results of Operations
<TABLE> Operating Results as Percent of Net Sales
<CAPTION> Second Fiscal Quarter Six Months
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross profit 21.9% 21.3% 23.0% 20.1%
Selling, general
and administrative
expenses 16.9% 26.8% 21.9% 30.5%
Operating income before
restructuring charge 5.6% (5.5%) 1.1% (10.4%)
Restructuring charge - 49.9% - 28.4%
Operating income (loss) 5.6% (55.4%) 1.1% (38.8%)
Net interest expense 4.7% 7.0% 5.7% 7.1%
Pre-tax income (loss) 2.1% (62.0%) (3.9%) (45.5%)
</TABLE>
Second Quarter
Net sales in the second quarter ended February 28, 1999 amounted to $58.9
million, an increase of 75.4% from $33.6 million in the same period a year
earlier. This increase is attributable to increased domestic sales in the
current year period.
Gross profit percentage increased to 21.9% from 21.3% in the prior period
primarily due to change in sales mix.
In the 1999 quarter, selling, general and administrative expenses increased
$.6 million from the prior year quarter but decreased as a percentage of net
sales from the prior year as a result of the sales increase.
Operating income before restructuring charge was $3.3 million or 5.6% of net
sales in the current year period compared to a loss of $1.8 million or (5.5%) of
net sales in the prior year period.
<Page 19>
Net interest expense of $2.8 million increased primarily due to expense related
to short-term borrowings of $18.5 million in the current period compared to no
such borrowings in the prior year period.
Net income increased $14.3 million to $.8 million, or two cents per share,
compared to a net loss of $13.5 million, or thirty two cents per share, during
the same period in the prior year. Total shares outstanding declined by 12.6%
at February 28, 1999 to 36.6 million from 41.9 million in the prior year.
Six Months
For the first six months of fiscal 1999, sales were $84.6 million, an increase
of 43.2% from $59.1 million in the comparable 1998 period. The sales increase
during the normal off-season six-month period is a result of domestic retailers
replenishing lower end-of-season inventories that were caused by extended warm
weather in the domestic market in 1998.
Gross profit margin percentage increased during the first six months of the
current year, compared to the same period in fiscal 1998, primarily due to a
change in sales mix.
Selling, general and administrative expenses decreased as a percentage of net
sales from the prior year as a result of the sales increase. For the six-month
period, these expenses amounted to a net increase of $.5 million, when compared
to the same period in fiscal 1998.
Operating income before restructuring was $.9 million or 1.1% of net sales in
the current year compared to a loss of $6.2 million or 10.4% of net sales in the
prior year.
Net interest expense increased as a percentage of net sales during the fiscal
1999 period due primarily to increased short-term borrowings.
The Company's net loss decreased $15.3 million to $2.1 million from $17.5
million in fiscal 1998. The net loss, net of tax effect, was $2.1 million, or
six cents per share, in the current year compared to a net loss before the
restructuring charge, net of tax effect, of $6.6 million, or 16 cents per share,
in the prior period.
Liquidity and Capital Resources
Working Capital - Working capital requirements of the Company are seasonal, with
cash balances peaking in the fourth quarter and the greatest utilization of its
lines of credit occurring early in the calendar year. Cash-on-hand at February
28, 1999 amounted to $5.4 million offset by short-term borrowings of $18.5
million compared to cash-on-hand at February 28, 1998 of $14.0 million and no
short-term borrowings and cash-on-hand at August 31, 1998 of $91.0 million and
no short-term borrowings. The decrease in cash from August 31, 1998 was due to
increased working capital needs ($13 million), repurchase of capital stock
($9.8 million) under the Company's $30 million plan, and cash dividends ($2.8
million) offset by increased short-term borrowings ($18.5 million). Cash
included $3.2 million and $1.6 million at Fedders Xinle, the Company's Chinese
joint venture, at February 28, 1999 and 1998, respectively.
<Page 20>
Net cash used in operations for the six months ended February 28, 1999, amounted
to $86.4 million, compared to $73.4 million in the prior year period. The
Company's operations required more cash due to greater production as a result of
the timing of sales volume. The principal use of cash in each period was to
produce finished goods for the seasonal requirements, which are heaviest in the
third fiscal quarter. Inventories were $99.0 million at February 28, 1999 versus
$117.4 million a year earlier.
Net cash used in investing activities consisted primarily of capital
expenditures of $4.2 million in the first six months of fiscal 1999.
Net cash provided by financing activities during the six-month period amounted
to $5.6 million, primarily due to short-term borrowings ($18.5 million) which
were partially offset by stock repurchases ($9.8 million) under the previously
announced stock repurchase plan of up to $30 million and for payment of
dividends ($2.8 million). At February 28, 1999, the Company had $18.5 million
of short-term borrowings, compared to no borrowings in the prior year period.
Management believes that the Company's cash, earnings and borrowing capacity are
adequate to meet the demands of its operations and its long-term credit
requirements.
Strategic Business Plan - At August 31, 1996 the Company had approximately 48.4
million shares of Preferred, Common, Class A and Class B Stock outstanding at a
weighted average closing price of $5.55. Since August 1996, the Company has
taken several strategic actions to improve its capital structure, operating
performance and increase shareholder value. A chronology of the major actions
are listed below.
In August 1997, a subsidiary of the Company issued $100 million principle amount
of 9 3/8% Senior Subordinated Notes (the "Notes") (Note G). A portion of the
proceeds of the Notes ($72.3 million) was received by the Company as a dividend
from the subsidiary and used to satisfy the Company's obligation on its 8 1/2%
Convertible Subordinated Debentures, repurchases of the Company's capital stock
(discussed below) and for general operating purposes.
Three stock repurchase plans have been announced totaling $105 million ($25
million in September 1996, $50 million in July 1997 and $30 million in August of
1998). Under these plans approximately $85 million of capital stock has been
repurchased to-date totaling 14.9 million shares at an average price of $5.74
per share.
In January 1998, the Company announced a plan to restructure its operations
which resulted in the Company recording a one-time expense totaling $16.8
million. The restructuring plan and its timing were designed to proactively
enhance the Company's competitiveness in global markets and further position it
to take full advantage of opportunities in the global room air conditioner
market. The restructuring did not result in factory closings. However it did
involve shifting some additional production from North America to China and
increasing component outsourcing.
At March 31, 1999 the Company had approximately 36.6 million shares of Common,
Class A and Class B Stock outstanding at a weighted average closing price of
$5.54.
<Page 21>
Year 2000 - The inventory and assessment phases of the Company's Year 2000 plan
are materially complete with respect to internal information technology ("IT")
and non-IT systems, such as embedded technology and micro controllers. Testing
and resolution phases, except with respect to business partner's and service
providers, of the plan are scheduled to be completed by June 30, 1999. The
National Retail Federation has listed the Company as being a compliant Year 2000
EDI vendor.
The Company's principle Year 2000 uncertainty relates to material third-party
relationships with customers and suppliers. Assessment of these relationships,
in part through on-site audits, is ongoing and contingency plans are being
developed to minimize the effect of any such issues. Contingency planning
includes the use of alternate suppliers, which the Company has in place for all
significant components. In addition, the Company is developing plans to protect
its facilities from any damage that could occur if a utility supplying that
facility was unable to provide service. Because the Company's business is
seasonal, and most customers in the domestic market do not take product until
close to the summer season, the Company will have a period of time to react to
any adverse consequences caused by a vendor of service provider who is not Year
2000 compliant. The Company cannot estimate lost revenues at this time, if any,
that are reasonably likely to be a result of Year 2000 issues.
Many of the Company's IT systems are already compliant. Non-compliant IT
systems are being replaced in the normal course of business and are not a cost
of Year 2000. The Company has not delayed any IT projects that are material to
its operations due to its Year 2000 efforts nor does it believe that any delay
in implementation of these projects will have any material financial impact on
the Company. Related costs are being expensed as incurred and in the first six
months of fiscal 1999 amounted to $.1 million. The Company estimates incurring
an additional $.1 million in remediation of its Year 2000 issues.
Forward-looking statements are covered under the "Safe-Harbor" clause of the
Private Securities Litigation Reform Act of 1995. Such statements are based
upon current expectations and assumptions. Actual results could differ
materially from those currently anticipated as a result of known and unknown
risks and uncertainties including, but not limited to, weather and economic,
political, market and industry conditions. Such factors are described in
Fedders' SEC filings, including its most recently filed annual report on Form
10-K. The Company disclaims any obligation to update any forward-looking
statements to incorporate subsequent events.
Item 3. Quantitative and Qualatative Disclosures about
Market Risk
None
<Page 22>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on December 22, 1998 to:
i. Elect Directors to hold office until the next Annual Meeting of
Stockholders and until each such Director's successor shall have been elected
and qualified;
ii. consider and act upon a proposal to approve a plan pursuant to which
150,000 shares of Class A Stock would be reserved for issuance to pay a portion
of the fee paid to non-employee Directors of the Company; and
iii. ratify the appointment of BDO Seidman, LLP as the Company's independent
auditors for the fiscal year ending August 31, 1999.
On the Election of Directors, the vote was:
Salvatore Giordano, nominee for Director: 16,410,643 for, and 415,685 withheld;
Sal Giordano, Jr., nominee for Director: 16,421,826 for, and 404,502 withheld;
Joseph Giordano, nominee for Director: 16,422,812 for, and 403,516 withheld;
Howard S. Modlin, nominee for Director: 16,455,954 for, and 370,374 withheld;
Clarence Russel Moll, nominee for Director: 16,443,491 for, and 382,837
withheld;
William J. Brennan, nominee for Director: 16,435,649 for, and 390,679 withheld;
Anthony E. Puleo, nominee for Director: 16,446,929 for, and 379,399 withheld;
S. A. Muscarnera, nominee for Director: 16,431,131 for, and 395,197 withheld;
David C. Chang , nominee for Director: 16,350,133 for and 476,195 withheld; and
C. A. Keen, nominee for Director: 16,442,191 for, and 384,137 withheld.
<Page 23>
On the approval of the plan to reserve stock to pay a portion of the fee to
non-employee Directors, the vote was 15,885,550 for, 828,910 against, and
111,868 abstained.
On the ratification of BDO Seidman, LLP as independent auditors, the vote was
16,525,960 for, 220,072 against, and 80,296 abstained.
<Page 24>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
None
<Page 25>
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.
FEDDERS CORPORATION
By: /S/Thomas A. Kroll
Corporate Controller
Date: April 09, 1999 Signing both in his capacity as
Corporate Controller and on behalf
of the registrant.
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<PERIOD-END> FEB-28-1999
<CASH> 5,439
<SECURITIES> 0
<RECEIVABLES> 43,391
<ALLOWANCES> 2,198
<INVENTORY> 98,952
<CURRENT-ASSETS> 155,322
<PP&E> 116,305
<DEPRECIATION> 60,011
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<BONDS> 107,260
0
0
<COMMON> 38,050
<OTHER-SE> 52,369
<TOTAL-LIABILITY-AND-EQUITY> 290,979
<SALES> 84,589
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<CGS> 65,111
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<NET-INCOME> (2,120)
<EPS-PRIMARY> (.06)
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