SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year-ended December 31, 2005
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: 333-119902
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Nortek,
Inc.
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(exact
name of registrant as specified in its charter)
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Delaware
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05-0314991
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification Number)
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50
Kennedy
Plaza
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Providence,
Rhode Island
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02903-2360
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(Address
of principal executive offices)
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(zip
code)
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Registrant’s
Telephone Number, Including
Area Code:
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(401)
751-1600
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Securities
registered pursuant to Section 12(b) of the Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined
in
Rule 405 of the Securities Act). Yes
[_] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes
[X] No
[_]
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 and (2) has been subject to such filing requirements for
the
past 90 days. Yes
[_] No
[X]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
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Large
accelerated filer [_]
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Accelerated
Filer [_]
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Non-accelerated
filer [X]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[_] No
[X]
The
aggregate market value of voting stock held by non-affiliates is
zero.
The
number of shares of Common Stock outstanding as of March 3, 2006 was
3,000.
PART
I
Item
1. Business.
General
The
Company is a diversified manufacturer of residential and commercial building
products, operating within three reporting segments:
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the
Residential Ventilation Products
Segment,
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the
Home Technology Products Segment, and
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the
Air Conditioning and Heating Products Segment.
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Through
these 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 market, the manufactured
housing market, the do-it-yourself, or DIY, market and the professional
remodeling and renovation markets.
The
levels of residential replacement and remodeling, new residential construction
and non-residential construction significantly impact the Company’s performance.
Interest rates, seasonality, inflation, consumer spending habits and
unemployment are factors that affect these levels.
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.
Additional
information concerning the Company’s business is set forth in Management’s
Discussion and Analysis of Financial Condition and Results of Operations, Item
7
of Part II of this report, incorporated herein by reference. Additional
information on foreign and domestic operations is set forth in Note 11 of the
Notes to the Consolidated Financial Statements, Item 8 of Part II of this
report, incorporated herein by reference.
Residential
Ventilation Products Segment
The
Residential Ventilation Products Segment primarily manufactures and distributes
room and whole house ventilation products and other products primarily for
the
residential new construction, DIY and professional remodeling and renovation
markets. The principal products of the Segment, which are sold under the Broan®,
NuTone®, Venmar® and Best® brand names, among others, are:
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•
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exhaust
fans (such as bath fans and fan, heater and light combination units),
and
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•
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indoor
air quality products.
|
The
Segment is the largest supplier in North America of range hoods and exhaust
fans
and one of the leading suppliers in Western Europe and South America of luxury
“Eurostyle” range hoods. The Segment’s kitchen range hoods expel grease, smoke,
moisture and odors from the cooking area and are offered under an array of
price
points and styles from economy to upscale models. The exhaust fans offered
by
the Segment are primarily used in bathrooms to remove odors and humidity
and
include combination units, which may have lights, heaters or both. The Segment’s
range hood and exhaust fan products are differentiated on the basis of air
movement as measured in cubic feet per minute and sound output as measured
in
sones. The Segment’s range hood and exhaust fan products, as well as its indoor
air quality products, are certified by the Home Ventilating Institute in
the
United States.
The
Company’s sales of kitchen range hoods and exhaust fans accounted for
approximately 15.9% and 14.7%, respectively, of the Company’s consolidated net
sales in 2005, 18.6% and 17.0%, respectively, of the Company’s consolidated net
sales in 2004 and 18.6% and 17.4%, respectively, of the Company’s consolidated
net sales in 2003.
The
Segment is one of the largest suppliers in North America of indoor air quality
products, which include air exchangers, and heat or energy recovery ventilators
(HRVs and ERVs) that provide whole house ventilation. These systems bring
in
fresh air from the outdoors while exhausting stale air from the home. Both
HRVs
and ERVs moderate the temperature of the fresh air by transferring heat from
one
air stream to the other. In addition, ERVs also modify the humidity content
of
the fresh air. The Segment also sells powered attic ventilators, which alleviate
heat build up in attic areas and prevent deterioration of roof
structures.
Since
the
late 1970s, homes have been built more airtight and insulated in order to
increase energy efficiency. According to published studies, this trend
correlates with an increased incidence of respiratory problems such as asthma
and allergies in individuals. In addition, excess moisture, which may be
trapped
in a home, has the potential to cause significant deterioration to the structure
and interiors of the home. Proper intermittent ventilation in high concentration
areas such as kitchens and baths as well as whole house ventilation will
mitigate these problems.
The
Segment also sells other products, which leverage its strong brand names
and
extensive distribution network. These products include among others, door
chimes, medicine cabinets, trash compactors, ceiling fans, and central vacuum
systems.
The
Company sells these products to distributors and dealers of electrical and
lighting products, kitchen and bath dealers, retail home centers and original
equipment manufacturers under the Broan®, NuTone®, Venmar®, and Best®, brand
names, among others. Private label customers accounted for approximately
21.7%
of the total sales of this Segment in 2005.
A
key
component of the Segment’s operating strategy is the introduction of new
products and innovations, which capitalize on the strong brand names and
the
extensive distribution system of the Segment’s businesses. These include the new
QT series of ultra-quiet exhaust fans with new grille styles, decorative
and
recessed fan / light combination units, as well as high performance range
hoods
used in today’s “gourmet” kitchen environments. The Company believes that the
Segment’s variety of product offerings and new product introductions help it to
maintain and improve its market position for its principal products. At the
same
time, the Company believes that the Segment’s status as a low-cost producer,
which is in large part due to its advanced manufacturing processes, provides
the
Segment with a competitive advantage.
The
Segment’s primary residential ventilation products compete with many domestic
and international suppliers in various markets. The Segment competes with
suppliers of competitive products primarily on the basis of quality,
distribution, delivery and price. Although the Segment believes it competes
favorably with other suppliers of residential ventilation products, some
of its
competitors have greater financial and marketing resources than the Segment.
Production
generally consists of fabrication from coil and sheet steel and formed metal
utilizing stamping, pressing and welding methods, assembly with components
and
subassemblies purchased from outside sources (principally motors, fan blades,
heating elements, wiring harnesses, controlling devices, glass, mirrors,
lighting fixtures and polyethylene components and electronic components)
and
painting, finishing and packaging. See the discussion on Raw Materials under
General Considerations below.
The
Segment had 13 manufacturing plants and employed approximately 2,800 full-time
people as of December 31, 2005, of which approximately 212 were covered by
a
collective bargaining agreement which expired in 2004 and was subsequently
renewed on January 19, 2006, extending into 2007, approximately 420 are covered
by a collective bargaining agreement which expired in 2005 and approximately
224
are covered by collective bargaining agreements which expire between 2007
and
2008. See the discussion on Employees under General Considerations
below.
The
Company believes that the Segment’s relationships with its employees are
satisfactory.
Home
Technology Products Segment
The
Home
Technology Products Segment manufactures and distributes products that provide
convenience and security in residential and light commercial applications.
The
principal products sold by the Segment are:
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•
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audio
/ video distribution and control
equipment,
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•
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speakers
and subwoofers,
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•
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security
and access control products,
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• |
power conditioners and surge
protectors, |
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• |
audio / video wall mounts and fixtures,
and |
The
Segment’s audio / video distribution and control equipment products include
multi-room / multi-source amplifiers, home theatre receivers, intercom systems,
hard disk media servers and control devices such as keypads, remote controls
and
volume controls. The Segment’s speakers are primarily built-in (in-wall or
in-ceiling) and are primarily used in multi-room or home theatre applications.
These products are sold under the Niles®, Elan®, SpeakerCraft®, JobSite®,
Proficient Audio Systems®, Sunfire®, Imerge®, Xantech®, M&S Systems®, and
ChannelPlus® brand names.
The
Segment’s security and access control products include residential and light
commercial intrusion protection systems, garage and gate operators and devices
to gain entry to buildings and gated properties such as radio transmitters,
keypads and telephone entry systems. These products are sold under the Linear®,
Westinghouse®, GTO/PRO®, Mighty Mule® and OSCO® brand names.
Other
products sold by the Segment include power conditioners and surge protectors
sold under the Panamax® brand name, audio / video wall mounts and fixtures sold
under the OmniMount® brand name and structured wiring products sold under the
OpenHouse® brand name.
The
Segment sells to distributors and dealers of security and low-voltage equipment,
professional installers, electronics retailers and original equipment
manufacturers.
The
majority of the Segment’s products are used in existing properties. Therefore,
the Segment is not heavily dependent on the level of new construction in the
United States. The penetration of audio / video distribution and control systems
in the United States housing stock is relatively low and is believed to be
growing. In addition, the demand for security and access control products in
the
United States is also believed to be growing due to homeowners’ post-911
security concerns.
A
key
component to the growth of this Segment has been strategic acquisitions of
companies with similar or complementary products and distribution channel
strengths. There have been ten acquisitions within the Segment during the past
three years. Post-acquisition savings and synergies have been realized in the
areas of manufacturing, sourcing and distribution as well as in the
administrative, engineering and sales and marketing areas.
The
Segment offers a broad array of products under various brand names with various
features and price points. This allows the company to maximize and grow
distribution in the professional installation and retail markets. Another key
component of the Segment’s operating strategy is the introduction of new
products and innovations, which capitalize on its well-known brand names and
strong customer relationships.
The
Segment’s primary products compete with many domestic and international
suppliers in various markets. In the access control market, the Segment’s
primary competitor is Chamberlain Corporation (a subsidiary of Duchossios
Industries, Inc.). The Segment competes with suppliers of competitive products
primarily on the basis of quality, distribution, delivery and price. Although
the Segment believes it competes favorably with other suppliers of home
technology products, some of its competitors have greater financial and
marketing resources than the Segment.
The
Segment has several administrative and distribution facilities in the United
States while a majority of its manufacturing facilities are located in China.
In
addition, certain products of the Segment are sourced from low cost Asian
suppliers based on its specifications. The Segment believes that its Asian
operations provide it with a competitive cost advantage.
The
Segment had 10 manufacturing plants and employed approximately 2,400 full-time
people as of December 31, 2005.
The
Company believes that the Segment’s relationships with its employees are
satisfactory.
Air
Conditioning and Heating Products Segment
The
Air
Conditioning and Heating Products Segment manufactures and sells heating,
ventilating and air conditioning, or HVAC, systems and products for site-built
residential and manufactured housing structures, custom-designed commercial
applications and standard light commercial products. For site-built homes and
light commercial structures, the Segment markets its products under the licensed
names Frigidaire®, Tappan®, Philco®, Kelvinator®, Gibson®, Westinghouse® and
Maytag® and certain private label names.
Residential
HVAC Products
The
Segment principally manufactures and sells split-system air conditioners,
heat
pumps, air handlers, furnaces and related equipment, accessories and parts
for
the residential and light commercial markets. Within the residential market,
the
Company believes that the Segment is one of the largest suppliers of these
products for manufactured homes in the United States and Canada. In the
manufactured housing market, the Segment markets its products under the
Intertherm® and Miller® brand names.
Demand
for replacing and modernizing existing equipment, the level of housing starts
and manufactured housing shipments are the principal factors that affect the
market for the Segment’s residential HVAC products. The Company anticipates that
the replacement market will continue to expand as a large number of previously
installed heating and cooling products become outdated or reach the end of
their
useful lives. This growth may be accelerated by a tendency among consumers
to
replace older heating and cooling products with higher efficiency models prior
to the end of such equipment’s useful life. The market for residential cooling
products, including those sold by the Segment, which excludes window air
conditioners, is affected by spring and summer temperatures. The window air
conditioner market is highly seasonal and significantly impacted by spring
and
summer temperatures. The Company believes that the Segment’s ability to offer
both heating and cooling products helps offset the effects of seasonality on
the
Segment’s sales.
The
Segment sells its manufactured housing products to builders of manufactured
housing and, through distributors, to manufactured housing retailers and owners.
The majority of sales to builders of manufactured housing consist of furnaces
designed and engineered to meet or exceed certain standards mandated by the
U.S.
Department of Housing and Urban Development (“HUD”) and other federal agencies.
These standards differ in several important respects from the standards for
furnaces used in site-built residential homes. The aftermarket channel of
distribution includes sales of both new and replacement air conditioning units
and heat pumps and replacement furnaces. The Company believes that the Segment
has one major competitor in the manufactured housing furnace market, York
International Corporation, which markets its products primarily under the
“Coleman” name. The Segment competes with most major industry manufacturers in
the manufactured housing air conditioning market.
This
Segment sells residential HVAC products for use in site-built homes through
independently owned distributors who sell to HVAC contractors. The site-built
residential HVAC market is very competitive. In this market, the Segment
competes with, among others, Carrier Corporation (a subsidiary of United
Technologies Corporation), Rheem Manufacturing Company, Lennox Industries,
Inc.,
The Trane Company (a subsidiary of American Standard Companies Inc.), York
International Corporation (a subsidiary of Johnson Controls, Inc.) and Goodman
Global, Inc. The Company estimates that approximately 57% of the Segment’s sales
of residential HVAC products in 2005 were attributable to the replacement
market, which tends to be less cyclical than the new construction market.
The
Segment competes in both the site-built and manufactured housing markets on
the
basis of breadth and quality of its product line, distribution, product
availability and price. Although the Company believes that the Segment competes
favorably with respect to certain of these factors, most of the Segment’s
competitors have greater financial and marketing resources and certain
competitors may enjoy greater brand awareness than the Segment.
Commercial
HVAC Products
The
Segment also manufactures and sells HVAC systems that are custom-designed to
meet customer specifications for commercial offices, manufacturing and
educational facilities, hospitals, retail stores and governmental buildings.
Such systems are designed primarily to operate on building rooftops (including
large self-contained walk-in-units), or on individual floors within a building,
and to have cooling capacities ranging from 40 to 600 tons. The Segment markets
its commercial HVAC products under the Governair®, Mammoth®, Temtrol®, Venmar
CES™, Ventrol® and Webco™ brand names. Also part of the Segment, the Company’s
subsidiary Eaton-Williams Group Limited (“Eaton-Williams”), manufactures and
markets custom and standard air conditioning and humidification equipment
throughout Western Europe under the Vapac®, Cubit®, Qualitair®, Edenaire®,
Colman™ and Moducel™ brand names.
The
market for commercial HVAC equipment is divided into standard and
custom-designed equipment. Standard equipment can be manufactured at a lower
cost and therefore offered at substantially lower initial prices than
custom-designed equipment. As a result, standard equipment suppliers generally
have a larger share of the overall commercial HVAC market than custom-designed
equipment suppliers, including the Segment. However, because of certain building
designs, shapes or other characteristics, the Company believes there are many
applications for which custom-designed equipment is required or is more cost
effective over the life of the building. Unlike standard equipment, the
Segment’s commercial HVAC equipment can be designed to match a customer’s exact
space, capacity and performance requirements. The Segment’s packaged rooftop and
self-contained walk-in equipment rooms maximize a building’s rentable floor
space because this equipment is located outside the building. In addition,
the
manner of construction and timing of installation of commercial HVAC equipment
can often favor custom-designed over standard systems. As compared with
site-built and factory built HVAC systems, the Segment’s systems are factory
assembled according to customer specifications and then installed by the
customer or third parties, rather than assembled on site, permitting extensive
testing prior to shipment. As a result, the Segment’s commercial systems can be
installed later in the construction process than site-built systems, thereby
saving the owner or developer construction and labor costs. The Segment sells
its commercial HVAC products primarily to contractors, owners and developers
of
commercial office buildings, manufacturing and educational facilities,
hospitals, retail stores and governmental buildings. The Segment seeks to
maintain strong relationships nationwide with design engineers, owners and
developers, and the persons who are most likely to value the benefits and
long-term cost efficiencies of the Segment’s custom-designed equipment.
The
Company estimates that about 42% of the Segment’s air conditioning and heating
product commercial sales in 2005 came from replacement and retrofit activity,
which typically is less cyclical than new construction activity and generally
commands higher margins. The Segment continues to develop product and marketing
programs to increase penetration in the growing replacement and retrofit market.
The
Segment’s commercial products are marketed through independently owned
manufacturers’ representatives and approximately 325 sales, marketing and
engineering professionals as of December 31, 2005. The independent
representatives are typically HVAC engineers, a factor which is significant
in
marketing the Segment’s commercial products because of the design intensive
nature of the market segment in which the Segment competes.
The
Company believes that the Segment is among the largest suppliers of
custom-designed commercial HVAC products in the United States. The Segment’s
four largest competitors in the commercial HVAC market are Carrier Corporation,
York International, McQuay International (a subsidiary of OYL Corporation),
and
The Trane Company. The Segment competes primarily on the basis of engineering
support, quality, design and construction flexibility and total installed system
cost. Although the Company believes that the Segment competes favorably with
respect to some of these factors, most of the Segment’s competitors have greater
financial and marketing resources than the Segment and enjoy greater brand
awareness. However, the Company believes that the Segment’s ability to produce
equipment that meets the performance characteristics required by the particular
product application provides it with advantages that some of its competitors
do
not enjoy.
The
Segment had 14 manufacturing plants and employed approximately 3,300 full-time
people as of December 31, 2005, of which approximately 125 are covered by a
collective bargaining agreement which expires in 2007. The Company believes
that
the Segment’s relationships with its employees are satisfactory.
GENERAL
CONSIDERATIONS
Employees
The
Company employed approximately 8,600 full time persons at December 31, 2005.
On
June
8, 2005 the Company’s collective bargaining agreement with the United Automobile
Aerospace & Agricultural Implement Workers of America and its Local No. 2029
expired. That agreement is estimated, as of December 31, 2005, to cover
approximately 4.9% of the Company’s employees (420 employees) which are located
at the Cincinnati, OH location of the Company’s subsidiary NuTone, Inc. The
Company has presented its final proposal to the union bargaining committee,
but
such proposal was not accepted by the union members. On July 16, 2005, the
Company locked out the union employees at the NuTone Cincinnati, OH facility.
On
September 6, 2005, the Company notified the union bargaining committee that
negotiations had reached an impasse and that it was unilaterally implementing
the terms of its final offer. On March 6, 2006, the Company received notice
that
the union filed an unfair labor practice charge with the US National Labor
Relations Board claiming that the Company had not bargained to impasse and
that,
from and after September 6, 2005, it had failed to bargain collectively and
in
good faith. The Company denies and will vigorously challenge such allegations.
The Company’s management has provided temporary manufacturing support to ensure
that operational disruptions are minimized and the Company’s customers’ needs
are met without significant delay. NuTone’s operating results are included in
the Company’s Residential Ventilation Products Segment. See Note 8
of the
Notes to the Consolidated Financial Statements, Item 8 of Part II of this
report, incorporated herein by reference.
A
work
stoppage at one of the Company’s facilities that lasts for a significant period
of time could cause the Company to lose sales, incur increased costs and
adversely affect its ability to meet customers’ needs. A plant shutdown or a
substantial modification to a collective bargaining agreement could result
in
material gains and losses or the recognition of an asset impairment. As
agreements expire, until negotiations are completed, it is not known whether
the
Company will be able to negotiate collective bargaining agreements on the
same
or more favorable terms as the current agreements or at all and without
production interruptions, including labor stoppages.
Backlog
Backlog
expected to be filled during 2006 was approximately $228,100,000 at December
31,
2005 ($144,900,000 at December 31, 2004). The higher level of backlog at
December 31, 2005 as compared to December 31, 2004 is principally due to an
increase in orders for 10 SEER residential HVAC products in the Company’s Air
Conditioning and Heating Products Segment prior to the change in the minimum
SEER rating on January 23, 2006.
Backlog
is not regarded as a significant factor for operations where orders are
generally for prompt delivery. While backlog stated for December 31, 2005 is
believed to be firm, as all orders are supported by either a purchase order
or a
letter of intent, the possibility of cancellations makes it difficult to assess
the firmness of backlog with certainty.
Research
and Development
The
Company’s research and development activities are principally new product
development and represent approximately 1.9%, 1.7% and 1.5% of the Company’s
consolidated net sales in 2005, 2004 and 2003, respectively.
Environmental
Considerations
See
Part
III, Legal Proceedings, of this report, incorporated herein by reference for
more information regarding the material effects that compliance with federal,
state and local provisions regulating the discharge of materials into the
environment may have upon capital expenditures, earnings and competitive
position.
Patents
and Trademarks
The
Company holds numerous design and process patents that it considers important,
but no single patent is material to the overall conduct of its business. It
is
the Company’s policy to obtain and protect patents whenever such action would be
beneficial to the Company. The Company owns or licenses numerous trademarks
that
it considers material to the marketing of its products, including Broan®,
NuTone®, Nautilus®, Venmar®, Guardian Plus™ Air Systems, vanEE®, Best®,
Governair®, Mammoth®, Temtrol®, Miller®, Intertherm®, Frigidaire®, Tappan®,
Philco®, Kelvinator®, Gibson®, Westinghouse®, Maytag®, Ventrol®, Webco™, Vapac®,
Cubit®, Qualitair®, Edenaire®, Linear®, Channel Plus®, Open House®, Xantech®,
Elan®, Via!®, SpeakerCraft®, Proficient Audio Systems®, OSCO®, OmniMount®,
M&S Systems®, Panamax®, Niles®, Sunfire®, Mighty Mule®, JobSite®, Imerge®
and GTO/PRO®. The Company believes that its rights in these trademarks are
adequately protected.
Raw
Materials
The
Company purchases raw materials and most components used in its various
manufacturing processes. The principal raw materials purchased by the Company
are rolled sheet steel, formed and galvanized steel, copper, aluminum, plate
mirror glass, various chemicals, paints and plastics.
The
materials, molds and dies, subassemblies and components purchased from other
manufacturers, and other materials and supplies used in manufacturing processes
have generally been available from a variety of sources. From time to time
increases in raw material costs can affect future supply availability due in
part to raw material demands by other industries. Whenever practical, the
Company establishes multiple sources for the purchase of raw materials and
components to achieve competitive pricing, ensure flexibility and protect
against supply disruption. The Company employs a company-wide procurement
strategy designed to reduce the purchase price of raw materials and purchased
components. The strategy focuses on adopting world-class procurement practices
to reduce the costs of purchased materials. The Company believes that the use
of
world-class strategic sourcing procurement practices will continue to enhance
its competitive position by reducing costs from its vendors and limiting cost
increases for goods and services in sectors experiencing rising
prices.
The
Company is subject to significant market risk with respect to the pricing of
its
principal raw materials. 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. See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Item 7 of Part II of this report, incorporated herein by reference
for further discussion.
Working
Capital
The
carrying of inventories to support customers and to permit prompt delivery
of
finished goods requires substantial working capital. Substantial working capital
is also required to carry receivables. The demand for the Company’s products is
seasonal, particularly in the Northeast and Midwest regions of the United States
and in Canada where inclement weather during the winter months usually reduces
the level of building and remodeling activity in both the home improvement
and
new construction markets. Certain of the residential product businesses in
the
Air Conditioning and Heating Products Segment have in the past been more
seasonal in nature than the Company’s other businesses’ product categories. As a
result, the demand for working capital of the Company’s subsidiaries is greater
from late in the first quarter until early in the fourth quarter. See “Liquidity
and Capital Resources” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Item 7 of Part II of this report,
incorporated herein by reference.
Website
The
Company’s periodic and current reports are available on its website,
www.nortek-inc.com, free of charge, as soon as reasonably practicable after
such
materials are filed with, or furnished to the Securities and Exchange Commission
(“SEC”).
Item
1A. Risk Factors.
The
Company’s business is sensitive to economic cycles and to the availability and
pricing of raw materials, and adverse changes in these factors could have a
negative impact on the Company’s business.
A
significant percentage of the Company’s sales of residential and commercial
building products is attributable to new residential and non-residential
construction, which are affected by cyclical factors such as interest rates,
seasonality, inflation, consumer spending habits and employment. In addition,
the Company is dependent upon raw materials including, among others, steel,
copper, packaging material, plastics, glass and aluminum and components that
we
purchase from third parties. Accordingly, the Company’s results of operations
and financial condition have in the past been, and may again in the future
be,
adversely affected by such cyclicality and increases in raw material or
component costs or their lack of availability.
If
the Company fails to integrate the businesses it has acquired or will acquire
in
the future, it could negatively impact the Company’s
business.
Historically,
the Company has engaged in a significant number of acquisitions. The Company
will continue to review future acquisition opportunities. The Company cannot
assure the reader that it will continue to locate and secure acquisition
candidates on terms and conditions that are acceptable to the Company. There
are
several risks in acquisitions, including:
| · |
the
difficulty and expense that the Company incurs in connection with
the
acquisition,
|
| · |
the
difficulty and expense that the Company incurs in the subsequent
assimilation of the operations of the acquired company into the Company’s
operations,
|
| · |
adverse
accounting consequences of conforming the acquired company’s accounting
policies to the Company’s,
|
| · |
the
difficulty in operating acquired
businesses,
|
| · |
the
diversion of management’s attention from the Company’s other business
concerns, and
|
| · |
the
potential loss of key employees previously employed at acquired
companies.
|
The
Company cannot assure the reader that any acquisition it has made or may make
will be successfully integrated into its on-going operations or that it will
achieve the estimated cost savings from the acquisition. If the operations
of an
acquired business do not meet expectations, the Company may be required to
restructure the acquired business or write-off the value of some or all of
the
assets of the acquired business.
Because
the Company competes against competitors with substantially greater resources,
the Company faces external competitive risks that may negatively impact the
business.
Substantially
all of the markets in which the Company operates are highly competitive and
many
of its competitors and potential competitors have substantially greater
financial and marketing resources than that of the Company. These competitive
factors could require the Company to reduce prices or increase spending on
product development, marketing and sales that would adversely affect the
operating results of the Company.
A
significant portion of the Company’s workforce is unionized and labor
disruptions could adversely affect the business.
As
of
December 31, 2005, approximately 11.5% of the Company’s workforce was subject to
various collective bargaining agreements. Collective bargaining agreements
covering approximately 2.5% of the Company’s workforce expired in 2004 and were
subsequently renewed on January 19, 2006, extending into 2007.
On
June
8, 2005 the Company’s collective bargaining agreement with the United Automobile
Aerospace & Agricultural Implement Workers of America and its Local No. 2029
expired. That agreement is estimated, as of December 31, 2005, to cover
approximately 4.9% of the Company’s employees (420 employees) which are located
at the Cincinnati, OH location of the Company’s subsidiary NuTone, Inc. The
Company has presented its final proposal to the union bargaining committee,
but
such proposal was not accepted by the union members. On July 16, 2005, the
Company locked out the union employees at the NuTone Cincinnati, OH facility.
On
September 6, 2005, the Company notified the union bargaining committee that
negotiations had reached an impasse and that it was unilaterally implementing
the terms of its final offer. On March 6, 2006, the Company received notice
that
the union filed an unfair labor practice charge with the US National Labor
Relations Board claiming that the Company had not bargained to impasse and
that,
from and after September 6, 2005, it had failed to bargain collectively and
in
good faith. The Company denies and will vigorously challenge such allegations.
The Company’s management has provided temporary manufacturing support to ensure
that operational disruptions are minimized and the Company’s customers’ needs
are met without significant delay. NuTone’s operating results are included in
the Company’s Residential Ventilation Products Segment. See Note 8 of the Notes
to the Consolidated Financial Statements, Item 8 of Part II of this report,
incorporated herein by reference.
A
work
stoppage at one of the Company’s facilities that lasts for a significant period
of time could cause the Company to lose sales, incur increased costs and
adversely affect its ability to meet customers’ needs. A plant shutdown or a
substantial modification to a collective bargaining agreement could result
in
material gains and losses or the recognition of an asset impairment. As
agreements expire, until negotiations are completed, it is not known whether
the
Company will be able to negotiate collective bargaining agreements on the
same
or more favorable terms as the current agreements or at all and without
production interruptions, including labor stoppages.
The
Company faces risks of litigation and liability claims on environmental, product
liability, workers compensation and other matters, the extent of which exposure
can be difficult or impossible to estimate and which can negatively impact
the
Company’s business, financial condition and results of
operations.
The
Company is subject to legal proceedings and claims arising out of its businesses
that cover a wide range of matters, including environmental matters, contract
and employment claims, product liability claims, warranty claims and claims
for
modification, adjustment or replacement of component parts of units sold.
Product liability, environmental and other legal proceedings include those
related to businesses or properties the Company has previously owned or
operated. The Company has used and continues to use various substances in its
products and manufacturing operations and has generated and continues to
generate waste, which have been or may be deemed to be hazardous or dangerous.
As such, the Company’s business is subject to and may be materially and
adversely affected by compliance obligations and other liabilities under
environmental, health and safety laws and regulations to which it is subject.
These laws and regulations affect ongoing operations and require capital costs
and operating expenses in order to achieve and maintain compliance and, if
violated, may result in fines, penalties and other sanctions. These laws and
regulations also impose liability, without regard to knowledge or fault,
relating to the existence of contamination at or associated with properties
used
in the Company’s current and former operations or those of its predecessors, or
at locations to which current or former operations or those of predecessors
have
shipped waste. The Company cannot be certain that identification of presently
unidentified environmental conditions, more vigorous enforcement by regulatory
agencies, enactment of more stringent laws and regulations, or other
unanticipated events will not arise in the future and give rise to material
environmental liabilities which could have a material adverse effect on its
business, financial condition or results of operations. The extent of the
Company’s potential liability under environmental, product liability and
workers’ compensation statutes, rules, regulations and case law cannot be
quantified at this time. Further, due to the lack of adequate information and
the potential impact of present and future regulations, there are circumstances
where no range of potential exposure can be reasonably estimated.
The
Company’s business operations could be significantly disrupted if the Company
lost members of its management team.
The
Company’s success depends to a significant degree upon the continued
contributions of its executive officers and key employees and consultants,
both
individually and as a group. The Company’s future performance will be
substantially dependent on its ability to retain and motivate them. The loss
of
the services of any of these executive officers or key employees and
consultants, particularly the Company’s chairman and chief executive officer,
Richard L. Bready, and other executive officers named in “Executive Officers of
the Company” could prevent the Company from executing its business strategy. See
“Directors and Executive Officers of the Registrant”.
A
significant equity investor controls the Company and its interests may not
be in
line with the reader’s interests.
Thomas
H.
Lee Equity Fund V, L.P. and its co-investors control the ultimate parent
company
of NTK Holdings, which is the sole shareholder of Nortek Holdings, Inc.,
which
is the sole shareholder of the Company, and exercise control over matters
requiring approval of the Company’s stockholders and board of directors. Thomas
H. Lee Equity Fund V, L.P. has the right to designate a majority of the members
of the management committee of the ultimate parent company of the Company.
In
addition, THL Managers V, LLC, an affiliate of Thomas H. Lee Equity Fund
V,
L.P., provides the Company with financial advisory and management consulting
services. Because of this control, transactions may be pursued that could
enhance this equity investment while involving risks to the reader’s interests.
There can be no assurance that the interests of the Company’s controlling equity
investor will not conflict with the reader’s interests. See “Certain
Relationships and Related Transactions.”
The
Company’s substantial debt could negatively impact its business and prevent the
Company from fulfilling its obligations under the
notes.
The
Company has a substantial amount of debt. At December 31, 2005, the Company
had
approximately $1,373,781,000 of total debt outstanding and a debt to equity
ratio of approximately 2.7:1. The terms of the Company’s other outstanding debt,
including the 8 1/2% Senior Subordinated Notes and the Company’s Senior Secured
Credit Facility limit, but do not prohibit, the Company from incurring
additional debt. At December 31, 2005, the Company had approximately $70,400,000
of additional borrowing capacity under the U.S. revolving portion of its Senior
Secured Credit Facility and approximately $10,000,000 of additional borrowing
capacity under the Canadian portion of its Senior Secured Credit Facility with
approximately $19,600,000 in outstanding letters of credit. If new debt is
added
to current debt levels, the related risks described below could intensify.
The
amount of total debt that the Company incurs could have important consequences,
including the following:
| · |
the
Company’s ability to obtain additional financing for working capital,
capital expenditures, acquisitions, refinancing indebtedness, or
other
purposes could be impaired,
|
| · |
a
substantial portion of the Company’s cash flow from operations will be
dedicated to paying principal and interest on its debt, thereby reducing
funds available for expansion or other
purposes,
|
| · |
the
Company may be more leveraged than some of its competitors, which
may
result in a competitive
disadvantage,
|
| · |
the
Company may be vulnerable to interest rate increases, as borrowings
under
the Company’s Senior Secured Credit Facility are at variable
rates,
|
| · |
the
Company’s failure to comply with the restrictions in its financing
agreements would have a material adverse effect on the Company,
and
|
| · |
the
Company’s significant amount of debt could make it more vulnerable to
changes in general economic conditions and could make it difficult
to
satisfy its obligations with respect to its outstanding
debt.
|
The
Company believes that it will need to access the capital markets in the future
to raise the funds to repay its debt. The Company has no assurance that it
will
be able to complete a refinancing or that it will be able to raise any
additional financing, particularly in view of the Company’s anticipated high
levels of debt and the restrictions under its current debt agreements. If the
Company is unable to satisfy or refinance its current debt as it comes due,
the
Company may default on its debt obligations. If the Company defaults on its
debt
obligations, virtually all of its other debt could become immediately due and
payable.
The
terms of our debt covenants could limit how we conduct our business and our
ability to raise additional funds.
The
agreements which govern the terms of the Company’s debt, including the
indentures that govern the 8
1/2%
Senior Subordinated Notes and the Company’s Senior Secured Credit Facility
contain covenants that restrict the Company’s ability and the ability of its
subsidiaries to:
| · |
incur
additional indebtedness,
|
| · |
pay
dividends or make other
distributions,
|
| · |
make
loans or investments,
|
| · |
enter
into agreements restricting its subsidiaries’ ability to pay
dividends,
|
| · |
enter
into transactions with affiliates,
and
|
| · |
consolidate,
merge or sell assets.
|
In
addition, the Company’s Senior Secured Credit Facility contains financial
maintenance covenants, and the Company cannot assure the reader that such
covenants will always be met. A breach of the covenants under the indentures
that govern the Company’s 8 1/2% Senior Subordinated Notes or under the
Company’s Senior Secured Credit Facility could result in an event of default
under the applicable indebtedness. Such default may allow the creditors, if
the
agreements so provide, to accelerate the related debt and may result in the
acceleration of any other debt to which a cross-acceleration or cross-default
provision applies. In addition, an event of default under the Company’s Senior
Secured Credit Facility would permit the lenders to terminate all commitments
to
extend further credit under that facility. Furthermore, if the Company was
unable to repay the amounts due and payable under its Senior Secured Credit
Facility, those lenders could proceed against the collateral granted to them
to
secure that indebtedness. In the event the Company’s lenders or noteholders
accelerate the repayment of their borrowings, the Company cannot assure the
reader that it and its subsidiaries would have sufficient assets to repay such
indebtedness. The Company’s future financing arrangements will likely contain
similar or more restrictive covenants. As a result of these restrictions, the
Company may be:
| · |
limited
in how it conduct its business,
|
| · |
unable
to raise additional debt or equity financing to operate during general
economic or business downturns, and
|
| · |
unable
to compete effectively or to take advantage of new business
opportunities.
|
These
restrictions may affect the Company’s ability to grow in accordance with its
plans.
The
Company may be unable to generate sufficient cash to service all of its
indebtedness and may be forced to take other actions to satisfy its obligations
under such indebtedness, which may not be successful.
The
Company’s ability to make scheduled payments on or to refinance its debt
obligations depends on its subsidiaries’ financial condition and operating
performance, which is subject to prevailing economic and competitive conditions
and to financial, business and other factors beyond the Company’s control. The
Company cannot assure the reader that its subsidiaries will maintain a level
of
cash flows from operating activities sufficient to permit the Company to pay
or
refinance its indebtedness. If the Company’s subsidiaries’ cash flows and
capital resources are insufficient to fund the Company’s debt service
obligations, the Company and its subsidiaries could face substantial liquidity
problems and may be forced to reduce or delay capital expenditures, sell assets,
seek additional
capital or restructure or refinance its indebtedness. These alternative measures
may not be successful and may not permit the Company to meet its scheduled
debt
service obligations.
The
Company may not be able to satisfy its obligations to holders of the Company’s
indebtedness upon a change of control.
A
change
of control may constitute an event of default under the Company’s Senior Secured
Credit Facility and would also require the Company to offer to purchase its
8
1/2% Senior Subordinated Notes at 10