apr0310_10qntk.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2010

[ ] 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: 001-34697

Nortek, Inc.
(exact name of registrant as specified in its charter)

Delaware	05-0314991
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

50 Kennedy Plaza Providence, Rhode Island	02903-2360
(Address of principal executive offices)	(zip code)

Registrant’s Telephone Number, Including Area Code: (401) 751-1600

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.Yes [_]No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_]No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [_]

Accelerated filer [_]

Non-accelerated filer [X]

Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [_]No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ]

There is no established public trading market for any of the common stock of the Company.

The number of shares of Common Stock outstanding as of May 14, 2010 was 15,000,000.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollar amounts in millions, except share data)

	Successor
	April 3,			December 31,
	2010			2009
Assets
Current Assets:
Unrestricted cash and cash equivalents	$	77.6		$	89.6
Restricted cash		3.3			1.3
Accounts receivable, less allowances of $2.4 and $0		247.5			249.1
Inventories:
Raw materials		78.1			72.9
Work in process		26.1			25.6
Finished goods		180.8			174.7
		285.0			273.2

Prepaid expenses		14.1			18.0
Other current assets		15.1			13.5
Prepaid income taxes		29.1			25.4
Total current assets		671.7			670.1

Property and Equipment, at Cost:
Land		16.5			18.5
Buildings and improvements		70.0			72.8
Machinery and equipment		156.6			155.8
		243.1			247.1
Less accumulated depreciation		9.4			2.2
Total property and equipment, net		233.7			244.9

Other Assets:
Goodwill		154.8			154.8
Intangible assets, less accumulated amortization of $11.8 and $1.5		526.6			536.6
Deferred debt expense		4.4			4.1
Restricted investments and marketable securities		2.4			2.4
Other assets		5.6			6.0
		693.8			703.9
Total Assets	$	1,599.2		$	1,618.9

Liabilities and Stockholders' Investment

Current Liabilities:
Notes payable and other short-term obligations	$	12.6		$	13.4
Current maturities of long-term debt		11.0			32.4
Long-term debt (Note F)		2.8			4.1
Accounts payable		141.6			124.5
Accrued expenses and taxes, net		184.6			174.9
Total current liabilities		352.6			349.3

Other Liabilities:
Deferred income taxes		104.7			112.6
Other		153.3			151.5
		258.0			264.1

Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		830.2			835.4

Commitments and Contingencies (Note G)

Stockholders' Investment:
Preferred stock, $0.01 par value, 10,000,000 authorized shares; none issued		---			---
Common stock, $0.01 par value, 90,000,000 authorized shares;
15,000,000 shares issued and outstanding at April 3, 2010
and December 31, 2009, respectively		0.1			0.1
Additional paid-in capital		172.5			171.9
Accumulated deficit		(16.8	)		(3.4	)
Accumulated other comprehensive income		2.6			1.5
Total stockholders' investment		158.4			170.1
Total Liabilities and Stockholders' Investment	$	1,599.2		$	1,618.9

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	For the three months ended
	Successor			Predecessor
	April 3, 2010			April 4, 2009
	(Dollar amounts in millions,
	except shares and per share data)

Net Sales	$	430.9		$	439.0

Costs and Expenses:
Cost of products sold		319.9			317.5
Selling, general and administrative expense, net		96.3			101.0
Amortization of intangible assets		10.5			5.9
		426.7			424.4
Operating earnings		4.2			14.6
Interest expense		(23.6	)		(38.3	)
Investment income		-			0.1
Loss before (benefit) provision for income taxes		(19.4	)		(23.6	)
(Benefit) provision for income taxes		(6.0	)		9.1
Net loss	$	(13.4	)	$	(32.7	)

Basic loss per share	$	(0.89	)	$	(10,900.00	)

Diluted loss per share	$	(0.89	)	$	(10,900.00	)

Weighted Average Common Shares:
Basic		15,000,000			3,000
Diluted		15,000,000			3,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	For the three months ended
	Successor			Predecessor
	April 3, 2010			April 4, 2009
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net loss	$	(13.4	)	$	(32.7	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		30.7			15.5
Non-cash interest expense, net		0.5			2.5
Stock-based compensation		0.6			-
Gain on sale of property and equipment		(0.3	)		(0.1	)
Deferred federal income tax provision		8.2			3.5
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		1.0			3.0
Inventories		(21.8	)		(1.3	)
Prepaids and other current assets		2.3			(0.3	)
Accounts payable		18.5			(11.6	)
Accrued expenses and taxes		(5.3	)		(5.2	)
Long-term assets, liabilities and other, net		0.6			1.8
Total adjustments to net loss		35.0			7.8
Net cash provided by (used in) operating activities		21.6			(24.9	)
Cash Flows from investing activities:
Capital expenditures		(3.2	)		(2.5	)
Net cash paid for businesses acquired		(1.3	)		(14.1	)
Proceeds from the sale of property and equipment		0.4			0.1
Change in restricted cash and marketable securities		(2.0	)		(0.2	)
Other, net		0.8			-
Net cash used in investing activities		(5.3	)		(16.7	)
Cash Flows from financing activities:
Increase in borrowings		20.0			-
Payment of borrowings		(47.8	)		(12.3	)
Other, net		(0.5	)		0.1
Net cash used in financing activities		(28.3	)		(12.2	)
Net change in unrestricted cash and cash equivalents		(12.0	)		(53.8	)
Unrestricted cash and cash equivalents at the beginning of the period		89.6			182.2
Unrestricted cash and cash equivalents at the end of the period	$	77.6		$	128.4

Supplemental disclosure of cash flow information:

Interest paid	$	2.3		$	32.0

Income taxes paid, net	$	3.8		$	5.7

The impact of changes in foreign currency exchange rates on cash was not material and has been included in Other, net.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NORTEK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

APRIL 3, 2010 AND APRIL 4, 2009

(A)	Basis of Presentation

Nortek, Inc. (“Nortek”) and all of its wholly-owned subsidiaries, collectively the “Company”, is a diversified manufacturer of innovative, branded residential and commercial building products, operating within four reporting segments (see Note D, “Segment Information”). Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the professional remodeling and replacement markets, the residential and commercial construction markets, the manufactured housing market and the do-it-yourself (“DIY”) market.

On December 17, 2009 (the “Effective Date”), the Company emerged from bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In connection with its emergence from bankruptcy, the Company adopted fresh-start reporting pursuant to the provisions of Accounting Standards Codification (“ASC”) 852, “Reorganization” (“ASC 852”). The Company selected December 19, 2009 as the fresh-start reporting date since it was the closest fiscal week-end to the Effective Date of December 17, 2009 and the effect of using December 19, 2009, instead of December 17, 2009, was not material to the Company’s financial condition or results of operations for the periods presented. ASC 852 requires the implementation of fresh-start reporting if the reorganization value of the assets of the entity that emerges from Chapter 11 is less than the sum of the post-petition liabilities and allowed claims, and holders of voting shares immediately before confirmation of the plan of reorganization receive less than 50 percent of the voting shares of the emerging entity. Under fresh-start reporting, a new reporting entity is deemed to be created and the assets and liabilities of the entity are reflected at their fair values.

Accordingly, the consolidated financial statements for the Company subsequent to emergence from Chapter 11 are not comparable to the consolidated financial statements for the Company prior to emergence from Chapter 11. References to the “Successor” refer to the Company subsequent to the fresh-start reporting date and references to the “Predecessor” refer to the Company prior to the fresh-start reporting date.

In addition, ASC 852 requires that financial statements, for periods including and subsequent to a Chapter 11 bankruptcy filing, distinguish between transactions and events that are directly associated with the reorganization proceedings and transactions and events associated with the ongoing operations of the business, as well as additional disclosures. The “Company”, when used in reference to the period subsequent to emergence from Chapter 11 bankruptcy proceedings, refers to the Successor, and when used in reference to periods prior to emergence from Chapter 11 bankruptcy proceedings, refers to the Predecessor.

The accompanying Successor and Predecessor unaudited condensed consolidated financial statements reflect the financial position, results of operations and cash flows of Nortek and all of its wholly-owned subsidiaries 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 annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Operating results for the first quarter ended April 3, 2010 are not necessarily indicative of the results that may be expected for other interim periods or for the year ending December 31, 2010. Certain amounts in the prior year’s unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation. The Company has evaluated subsequent events for potential recognition or disclosure through the date the financial statements were issued, May 18, 2010.

It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s registration statement on Form 10 and its periodic reports filed with the Securities and Exchange Commission (“SEC”).

The Company operates on a calendar year and for its interim periods operates on a 4-4-5 fiscal calendar, where each fiscal quarter is comprised of two 4-week periods and one 5-week period, with each week ending on a Saturday. The Company’s fiscal year always begins on January 1 and ends on December 31. As a result, the Company’s first and fourth quarters may have more or less days included than a traditional 4-4-5 fiscal calendar, which consists of 91 days. The first quarters ended April 3, 2010 (“first quarter of 2010”) and April 4, 2009 (“first quarter of 2009”) include 93 days and 94 days, respectively.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 which establishes additional disclosure requirements for fair value measurements. According to the guidance, the fair value hierarchy disclosures are to be further disaggregated by class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. In addition, significant transfers between Levels 1 and 2 of the fair value hierarchy will be required to be disclosed. These additional requirements are effective January 1, 2010 for quarterly and annual reporting. These amendments did not have an impact on the Company’s results from operations or financial condition as this guidance relates only to additional disclosures (see Note H, “Fair Value”). In addition, the guidance requires more detailed disclosures of the changes in Level 3 instruments. These changes will be effective January 1, 2011 and are not expected to have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13 which amends revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. This guidance is effective for transactions entered into after January 1, 2011. The Company expects to adopt this guidance on January 1, 2011 and does not expect it to have a material impact on the consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-14 which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance must be adopted in the same period that a company adopts ASU No. 2009-13 described in the preceding paragraph. Therefore, the Company expects to adopt this guidance on January 1, 2011 and does not expect it to have a material impact on the consolidated financial statements.

(B)	Comprehensive Loss

Comprehensive loss includes net loss, unrealized gains and losses from currency translation, and pension liability adjustments, net of tax. Comprehensive loss for the first quarter of 2010 and 2009 is as follows:

	For the first quarter of
	Successor			Predecessor
	2010			2009
	(Dollar amounts in millions)

Net loss	$	(13.4	)	$	(32.7	)
Other comprehensive income (loss):
Currency translation adjustment		0.8			(1.7	)
Pension liability adjustment		0.3			0.1
Comprehensive loss	$	(12.3	)	$	(34.3	)

The Company calculates basic and diluted earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic earnings (loss) per share amounts are computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share amounts are computed using the weighted average number of common shares outstanding and dilutive potential common shares outstanding during each period.

The reconciliation between basic and diluted loss per share is as follows:

	For the first quarter of
	Successor			Predecessor
	2010			2009
	(Dollar amounts in millions,
	except shares and per share data)

Net loss	$	(13.4	)	$	(32.7	)

Weighted average common shares outstanding		15,000,000			3,000
Dilutive effect of common stock equivalents		---			---
Dilutive shares outstanding		15,000,000			3,000

Basic loss per share	$	(0.89	)	$	(10,900.00	)

Diluted loss per share	$	(0.89	)	$	(10,900.00	)

The effect of potential common share equivalents, including warrants, unvested restricted stock, and stock options were excluded from the computation of diluted shares outstanding for the first quarter of 2010, as inclusion would have resulted in anti-dilution. A summary of these common share equivalents excluded from the first quarter of 2010 is as follows:

Warrants			789,474
Restricted stock			712,731
Stock options			712,731
Total			2,214,936

There were no potential common share equivalents outstanding during the first quarter of 2009.

Earnings (loss) per share for the first quarter of 2010 is not comparable to that for the first quarter of 2009, as all Predecessor common stock was extinguished as part of the Company’s reorganization.

(D)	Segment Information

The Company is a diversified manufacturer of innovative, branded residential and commercial building products, operating within four reporting segments:

·	the Residential Ventilation Products (“RVP”) segment,

·	the Home Technology Products (“HTP”) segment,

·	the Residential Air Conditioning and Heating Products (“R-HVAC”) segment, and

·	the Commercial Air Conditioning and Heating Products (“C-HVAC”) segment.

Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the professional remodeling and replacement markets, the residential and commercial construction markets, the manufactured housing market and the DIY market.

The RVP segment manufactures and sells room and whole house ventilation products and other products primarily for the professional remodeling and replacement markets, the residential new construction market and the DIY market. The principal products sold by this segment include:

·	kitchen range hoods,

·	exhaust fans (such as bath fans and fan, heater and light combination units), and

·	indoor air quality products.

The HTP segment manufactures and sells a broad array of products designed to provide convenience and security for residential and certain commercial applications. The principal products sold by this segment are:

·	audio / video distribution and control equipment,

·	speakers and subwoofers,

·	security and access control products,

·	power conditioners and surge protectors,

·	audio / video wall mounts and fixtures,

·	lighting controls and home integration products, and

·	structured wiring.

The R-HVAC segment manufactures and sells heating, ventilating and air conditioning systems for site built residential and manufactured housing structures and certain commercial markets. The principal products sold by the segment are split-system and packaged air conditioners and heat pumps, air handlers, furnaces and related equipment.

The C-HVAC segment manufactures and sells heating, ventilating and air conditioning systems for custom-designed commercial applications to meet customer specifications. The principal products sold by the segment are large custom rooftop cooling and heating products.

The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. Intersegment net sales and intersegment eliminations are not material for any of the periods presented. The financial statement impact of all purchase accounting adjustments, including intangible assets amortization and goodwill, are reflected in the applicable operating segment, which are the Company’s reporting units.

Unaudited net sales, operating earnings (loss) and loss before (benefit) provision for income taxes for the Company’s reporting segments for the first quarter of 2010 and 2009 were as follows:

	For the first quarter of
	Successor			Predecessor
	2010			2009
	(Dollar amounts in millions)
Net sales:
Residential ventilation products	$	153.0		$	149.9
Home technology products		94.2			98.4
Residential HVAC products		96.9			82.4
Commercial HVAC products		86.8			108.3
Consolidated net sales	$	430.9		$	439.0

Operating earnings (loss):
Residential ventilation products (1)	$	15.3		$	9.0
Home technology products (2)		(7.4	)		1.1
Residential HVAC products (3)		1.2			(5.3	)
Commercial HVAC products (4)		2.1			16.2
Subtotal		11.2			21.0
Unallocated, net		(7.0	)		(6.4	)
Consolidated operating earnings		4.2			14.6
Interest expense		(23.6	)		(38.3	)
Investment income		-			0.1
Loss before (benefit) provision for income taxes	$	(19.4	)	$	(23.6	)

(1) Includes amortization of fair value allocated to inventory recorded as a non-cash charge to cost of products sold of approximately $1.3 million for the first quarter of 2010.

(2)

Includes amortization of fair value allocated to inventory recorded as a non-cash charge to cost of products sold of approximately $7.0 million and reserves of approximately $2.0 million

(see Note G, “Commitments and Contingencies”) for the first quarter of 2010.

(3) Includes amortization of fair value allocated to inventory recorded as a non-cash charge to cost of products sold of approximately $0.7 million for the first quarter of 2010.

(4) Includes amortization of fair value allocated to inventory recorded as a non-cash charge to cost of products sold of approximately $0.7 million for the first quarter of 2010.

(E)	Income Taxes

The Company provided for income taxes on an interim basis based upon the estimated annual effective tax rate for 2010 and 2009. The following reconciles the federal statutory income tax rate to the effective tax rate of approximately 30.9% and (38.6)% for the first quarter of 2010 and 2009:

	For the first quarter of
	Successor			Predecessor
	2010			2009
Income tax at the federal statutory rate		35.0	%		35.0	%
Net change from federal statutory rate:
Increase in valuation allowance related to deferred tax assets		(5.2	)		(61.5	)
(Increase) decrease in FIN 48 reserves, including interest		(0.6	)		5.8
State income tax provision (benefit), net of federal income tax effect		2.4			(13.9	)
Tax effect resulting from foreign activities		(0.3	)		(1.1	)
Non-deductible expenses		(1.2	)		(3.0	)
Other, net		0.8			0.1
Income tax at effective rate		30.9	%		(38.6	)%

As of January 1, 2010, the Company had a liability of approximately $22.0 million for unrecognized tax benefits related to various federal, foreign and state income tax matters. As a result of additional provisions to the reserve during the first quarter of 2010, the liability for uncertain tax positions at April 3, 2010 was approximately $22.6 million. The corresponding amount of gross uncertain tax benefits was approximately $23.4 million and $22.9 million at April 3, 2010 and December 31, 2009, respectively.

As of April 3, 2010, the Company has approximately $4.2 million in unrecognized benefits relating to various state tax issues, for which the statute of limitations is expected to expire in 2010.

As of January 1, 2010, the Company had accrued liabilities of approximately $3.8 million for interest related to uncertain tax positions. As of April 3, 2010, the total amount of accrued interest related to uncertain tax positions is approximately $4.0 million. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state taxes.

(F)	Notes, Mortgage Notes and Obligations Payable

At April 3, 2010 and December 31, 2009, the Company’s Best subsidiary was not in compliance with certain maintenance covenants with respect to certain loan agreements and as a result, the Company classified approximately $2.8 million and $4.1 million of outstanding borrowings under such “long-term debt” agreements as a current liability on its unaudited condensed consolidated balance sheet at April 3, 2010 and December 31, 2009, respectively. The Company’s Best subsidiary obtained letters from its lenders, which indicated that the lenders are not going to take any action related to the covenant noncompliance at this time. The next measurement date for the maintenance covenant is for the year ended December 31, 2010 and the Company believes that it is probable that Best will not be in compliance with the maintenance covenant when their assessment of the required calculation is completed in the first quarter of 2011. No assurances can be given that Best will be successful in obtaining further waivers and accordingly, the Company could be required to repay the outstanding long-term portion related to these loans of approximately $2.8 million if the event of non-compliance is not cured or waived.

The indenture governing the 11% Senior Secured Notes due 2013 (the “11% Notes”) and the credit agreement for the Company’s $300.0 million asset-based revolving credit facility (the “New ABL Facility”) contain certain restrictive financial and operating covenants, including covenants that restrict, among other things, the payment of cash dividends, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indenture and credit agreement). As of April 3, 2010, the Company did not have the capacity to make certain payments, including dividends, under the New ABL Facility. Subsequent to April 3, 2010, the Company voluntarily repaid $5.0 million of outstanding borrowings under the New ABL Facility and accordingly has classified such amount as current in the accompanying unaudited condensed consolidated balance sheet.

(G)	Commitments and Contingencies

The Company has indemnified third parties for certain matters in a number of transactions involving dispositions of former subsidiaries. The Company has recorded liabilities in relation to these indemnifications of approximately $9.0 million at April 3, 2010, of which approximately $5.1 million are recorded in accrued expenses and approximately $3.9 million are recorded in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. At April 3, 2010, the estimated undiscounted future payments related to these indemnifications are expected to be approximately $9.8 million. At December 31, 2009, the Company had recorded liabilities in relation to these indemnifications of approximately $9.2 million, of which approximately $4.6 million was recorded in accrued expenses and approximately $4.6 million was recorded in other long-term liabilities in the accompanying condensed consolidated balance sheet.

The Company sells a number of products and offers a number of warranties including, in some instances, extended warranties for which the Company receives proceeds. The specific terms and conditions of these warranties vary depending on the product sold and the country in which the product is sold. The Company estimates the costs that may be incurred under its warranties, with the exception of extended warranties, and records a liability for such costs at the time of sale. Deferred revenue from extended warranties is recorded at the estimated fair value of the liability and is amortized over the life of the warranty and periodically reviewed to ensure that the amount recorded is equal to or greater than estimated future costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary.

Changes in the Company’s combined short-term and long-term warranty accruals during the first quarter of 2010 are as follows:

	For the first quarter of
	Successor			Predecessor
	2010			2009
	(Dollar amounts in millions)

Balance, beginning of the period	$	54.3		$	51.5
Warranties provided during the period		5.4			7.1
Settlements made during the period		(5.0	)		(6.4	)
Changes in liability estimate, including expirations		0.5			(0.4	)
Balance, end of the period	$	55.2		$	51.8

In the fourth quarter of 2009, two of the Company’s subsidiaries in the HTP segment began shipping security products to a new customer under an agreement to manufacture and sell products with an expected net sales value of approximately $45.0 million in 2010. The agreement includes payment terms which are extended beyond the subsidiaries’ normal payment terms and the Company has evaluated the credit worthiness of this customer and concluded that collectability is not reasonably assured. Accordingly, the Company has deferred revenue recognition on approximately $12.2 million and $7.2 million of sales at April 3, 2010 and December 31, 2009, respectively. The Company will recognize revenue related to this customer when cash is collected. Inventories with a cost of approximately $9.2 million and $5.6 million at April 3, 2010 and December 31, 2009, respectively, have been recorded in other current assets in the accompanying unaudited condensed consolidated balance sheet. In addition, at April 3, 2010, the Company has included in inventory approximately $10.9 million of products shipped to this customer subsequent to April 3, 2010 and expects to ship an additional $12.8 million of products during the second quarter of 2010. The Company has little business and collection experience with this customer and there can be no assurances that the Company will be able to collect all or any amounts due from this customer or that the Company will be able to recover all or any of the inventories shipped to this customer. The Company has recorded loss contingency reserves of approximately $5.0 million and $3.0 million as a reduction to other current assets as of April 3, 2010 and December 31, 2009, respectively. The Company’s expectation is that it will receive payment in full, net of applicable reserves, from this customer.

The Company is subject to other contingencies, including legal proceedings and claims, arising out of its businesses that cover a wide range of matters including, among others, environmental matters, contract and employment claims, product liability, warranty and modification and adjustment or replacement of component parts of units sold, which include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.

While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in the Company’s assumptions or strategies related to these contingencies or changes that are not within the Company’s control.

(H)	Fair Value

Fair Value of Financial Instruments

Below is information regarding the fair value of each class of financial instruments for which it is practicable to estimate fair value:

Cash and Cash Equivalents --

The carrying amount approximates fair value because of the short maturity of those instruments.

Restricted Investments and Marketable Securities --

The fair value of investments is based on quoted market prices. The fair value of investments was not materially different from their cost basis at April 3, 2010 or December 31, 2009.

Long-Term Debt --

At April 3, 2010 and December 31, 2009, the fair value of the Company’s long-term indebtedness was approximately equal to the amount on the accompanying unaudited condensed consolidated balance sheet based, in part, on a third party valuation.

(I)	Pension, Profit Sharing & Other Post-Retirement Benefits

The Company and its subsidiaries have various pension plans, supplemental retirement plans for certain officers, profit sharing and other post-retirement benefit plans requiring contributions to qualified trusts and union administered funds.

Pension and profit sharing expense charged to operations aggregated approximately $1.0 million and $1.2 million for the first quarter of 2010 and 2009, respectively.

The Company’s policy is to generally fund currently at least the minimum required annual contribution of its various qualified defined benefit plans. At April 3, 2010, the Company estimated that approximately $4.3 million would be contributed to the Company’s defined benefit pension plans in 2010, of which approximately $0.8 million was contributed through the first quarter of 2010.

The Company’s unaudited net periodic benefit cost for its defined benefit plans for the first quarter of 2010 and 2009 consists of the following components:

	For the first quarter of
	Successor			Predecessor
	2010			2009
	(Dollar amounts in millions)

Service cost	$	0.1		$	0.1
Interest cost		2.2			2.3
Expected return on plan assets		(2.1	)		(1.8	)
Recognized actuarial loss		---			0.2
Net periodic benefit cost	$	0.2		$	0.8

The Company’s unaudited net periodic benefit cost, consisting solely of interest costs, for its Post-Retirement Health Benefit Plan for the first quarter of 2010 was approximately $0.1 million. The Company’s unaudited net periodic benefit cost for the first quarter of 2009 was zero.

NORTEK, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FIRST QUARTER ENDED APRIL 3, 2010

AND THE FIRST QUARTER ENDED APRIL 4, 2009

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

We are a diversified manufacturer of innovative, branded residential and commercial building products, operating within four reporting segments:

·	the Residential Ventilation Products (“RVP”) segment,

·	the Home Technology Products (“HTP”) segment,

·	the Residential Air Conditioning and Heating Products (“R-HVAC”) segment, and

·	the Commercial Air Conditioning and Heating Products (“C-HVAC”) segment.

Through these segments, we manufacture and sell, primarily in the United States, Canada and Europe, a wide variety of products for the professional remodeling and replacement markets, the residential and commercial construction markets, the manufactured housing market and the do-it-yourself (“DIY”) market.

·	kitchen range hoods,

·	exhaust fans (such as bath fans and fan, heater and light combination units), and

·	indoor air quality products.

·	audio / video distribution and control equipment,

·	speakers and subwoofers,

·	security and access control products,

·	power conditioners and surge protectors,

·	audio / video wall mounts and fixtures,

·	lighting controls and home integration products, and

·	structured wiring.

Basis of Presentation

On December 17, 2009 (the “Effective Date”), we emerged from bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In connection with our emergence from bankruptcy, we adopted fresh-start reporting pursuant to the provisions of Accounting Standards Codification (“ASC”) 852, “Reorganization” (“ASC 852”). We selected December 19, 2009 as the fresh-start reporting date since it was the closest fiscal week-end to the Effective Date of December 17, 2009 and the effect of using December 19, 2009, instead of December 17, 2009, was not material to our financial condition or results of operations for the periods presented. ASC 852 requires the implementation of fresh-start reporting if the reorganization value of the assets of the entity that emerges from Chapter 11 is less than the sum of the post-petition liabilities and allowed claims, and holders of voting shares immediately before confirmation of the plan of reorganization receive less than 50 percent of the voting shares of the emerging entity. Under fresh-start reporting, a new reporting entity is deemed to be created and the assets and liabilities of the entity are reflected at their fair values.

Accordingly, our consolidated financial statements subsequent to emergence from Chapter 11 are not comparable to our consolidated financial statements prior to emergence from Chapter 11. References to the “Successor” refer to periods subsequent to December 20, 2009 and references to the “Predecessor” refer to periods prior to December 19, 2009. Operating results for the first quarter ended April 3, 2010 are not necessarily indicative of the results that may be expected for other interim periods or for the year ending December 31, 2010. We have evaluated subsequent events for potential recognition or disclosure through the date the financial statements were issued, May 18, 2010.

We operate on a calendar year and for interim periods operate on a 4-4-5 fiscal calendar, where each fiscal quarter is comprised of two 4-week periods and one 5-week period, with each week ending on a Saturday. Our fiscal year always begins on January 1 and ends on December 31. As a result, our first and fourth quarters may have more or less days included than a traditional 4-4-5 fiscal calendar, which consists of 91 days. The first quarters ended April 3, 2010 (“first quarter of 2010”) and April 4, 2009 (“first quarter of 2009”) include 93 days and 94 days, respectively.

This Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) is intended to help the reader understand Nortek, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes thereto contained herein. The “Results of Operations” and “Liquidity and Capital Resources” sections which follow contain various tables that are intended to assist the reader in comparing current results with the prior period. Unless the context requires otherwise, the terms “Nortek,” “Company,” “we” and “our” in this MD&A refer to Nortek, Inc. and its wholly-owned subsidiaries.

Industry Overview

Critical factors affecting our future performance, including our level of sales, profitability and cash flows, are the levels of residential remodeling and replacement activity and new residential and non-residential construction activity. The level of new residential and non-residential construction activity and the level of residential remodeling and replacement activity are affected by seasonality and cyclical factors such as interest rates, inflation, consumer spending, employment levels and other macroeconomic factors, over which we have no control. Any decline in economic activity as a result of these or other factors typically results in a decline in residential and non-residential new construction and, to a lesser extent, residential and non-residential remodeling and replacement spending, which would result in a decrease in our sales, profitability and cash flows.

The severe impact of the worldwide crisis in the credit and financial markets in 2009, the instability in the troubled mortgage market, the level of unemployment and the decline in home values have had a negative impact on residential and non-residential new construction activity, consumer disposable income and spending on home remodeling and repair expenditures. These factors had an adverse effect on our operating results for 2009 and are expected to continue in 2010.

Changes in key industry activity affecting our businesses in the United States for the first quarter of 2010, the fourth quarter of 2009 and the full year of 2009 as compared to the same periods of 2009 and 2008, respectively, were as follows:

			% Increase (Decrease)
	Sources		1st Quarter			4th Quarter			Full Year
	of Data		2010			2009			2009
Private residential construction spending		1		(4	)%		(16	)%		(28	)%
Total housing starts		1		17	%		(20	)%		(39	)%
New home sales		1		2	%		(2	)%		(23	)%
Existing home sales		2		12	%		26	%		5	%
Residential improvement spending		1		8	%		5	%		(4	)%
Central air conditioning and heat pump shipments		3		7	%		15	%		(12	)%
Private non-residential construction spending		1		(25	)%		(22	)%		(12	)%
Manufactured housing shipments		1		(2	)%		(27	)%		(39	)%
Residential fixed investment spending		4		(4	)%		(13	)%		(21	)%

Source of data:

(1)	U.S. Census Bureau
(2)	National Association of Realtors
(3)	Air Conditioning and Refrigeration Institute
(4)	U.S. Bureau of Economic Analysis

In addition, according to the Canada Mortgage and Housing Corporation, Canadian housing starts increased approximately 47% in the first quarter of 2010 as compared to the first quarter of 2009, and decreased approximately 1% and 29% in the fourth quarter and full year of 2009 as compared to the same periods of 2008.

The demand for certain of our products is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during winter months usually reduces the level of building and remodeling activity in both home improvement and new construction markets, thereby reducing our sales levels during the first and fourth quarters.

We are subject to the effects of changing prices and the impact of inflation which could have a significant adverse effect on our results of operations for the periods presented. In some circumstances, market conditions or customer expectations may prevent us from increasing the prices of our products to offset inflationary or other pricing pressures. During the first quarter of 2010, we experienced lower material costs as a percentage of net sales as compared to the first quarter of 2009 related primarily to lower prices, in part from strategic sourcing initiatives related to the purchases of steel and related purchased components, such as compressors and plastics. The change in the percentage of material costs as a percentage of net sales also reflects the effect of the relative mix of products sold, the effect of changes in sales prices, as well as, the effect of changes in productivity levels. In the second half of 2009, the price of certain commodities (steel, copper, and aluminum) began to increase over price levels experienced in the first half of 2009, and continued to increase in the first quarter of 2010 as compared to the fourth quarter of 2009. Additionally, during the first quarter of 2010, we experienced increased freight costs primarily due to increased fuel surcharges as compared to the first quarter of 2009. Continued strategic sourcing initiatives and improvements in manufacturing efficiency, as well as sales price increases, help to mitigate fluctuations in these costs.

Outlook

Our outlook for the remainder of 2010 is for the challenging market conditions to continue. The weak economy and credit markets are expected to continue to impact the level of residential and non-residential new construction, as well as consumer confidence and the related spending on home remodeling and repairs. In the second half of 2009 and first quarter of 2010, we believe certain governmental incentives and policies resulted in higher sales levels of existing homes and new housing starts, which in turn resulted in increased sales volume for certain of our products. In the fourth quarter of 2009, the government extended to April 2010 certain of these incentives for consumers to purchase homes. There can be no assurance that these governmental incentives and the resulting increased levels of housing activity will continue and as a result we may experience further declines in sales until such time as unemployment rates significantly decline and consumer confidence improves.

We are looking at our business with a long-term view and a continued focus on our low-cost country sourcing strategy and cost reduction initiatives. Balance sheet management is an extremely important priority for all of our businesses so they can maximize cash flow from operating activities. During this challenging environment, we will fund necessary capital investments that will improve our business operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. If different conditions result from those assumptions used in our judgments, the results could be materially different from our estimates.

Our critical accounting policies include:

·	Revenue Recognition, Accounts Receivable and Related Expenses,

·	Inventory Valuation,

·	Income Taxes,

·	Goodwill and Other Long-Lived Assets,

·	Pensions and Post-Retirement Health Benefits,

·	Warranty, Product Recalls and Safety Upgrades,

·	Insurance Liabilities, including Product Liability, and

·	Contingencies.

Further detail regarding our other critical accounting policies can be found in the consolidated financial statements and the notes included in our registration statement on Form 10 as filed with the Securities and Exchange Commission (“SEC”) on April 15, 2010.

Results of Operations

The following table presents the financial information for our reporting segments for the first quarter of 2010 and 2009:

	For the first quarter of
	Successor			Predecessor				Net Change
	2010			2009				$			%
	(Dollar amounts in millions)
Net sales:
Residential ventilation products	$	153.0		$	149.9			$	3.1		2.1	%
Home technology products		94.2			98.4				(4.2	)	(4.3	)
Residential HVAC products		96.9			82.4				14.5		17.6
Commercial HVAC products		86.8			108.3				(21.5	)	(19.9	)
Consolidated net sales	$	430.9		$	439.0			$	(8.1	)	(1.8	) %
Operating earnings (loss):
Residential ventilation products (1)	$	15.3		$	9.0			$	6.3		70.0	%
Home technology products (2)		(7.4	)		1.1				(8.5	)	*
Residential HVAC products (3)		1.2			(5.3	)			6.5		*
Commercial HVAC products (4)		2.1			16.2				(14.1	)	(87.0	)
Subtotal		11.2			21.0				(9.8	)	(46.7	)
Unallocated, net		(7.0	)		(6.4	)			(0.6	)	(9.4	)
Consolidated operating earnings	$	4.2		$	14.6			$	(10.4	)	(71.2	) %

Operating earnings (loss) margin:
Residential ventilation products (1)		10.0	%		6.0		%
Home technology products (2)		(7.9