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, 2008
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: 333-126389
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NTK
Holdings, Inc.
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(exact name
of registrant as specified in its charter)
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Delaware
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20-1934298
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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
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:
(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,
a non-accelerated filer or a smaller reporting company (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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Smaller
reporting company [_]
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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]
There is no
established public trading market for any of the common stock of the
Company. The aggregate market value of voting stock held by
non-affiliates is zero.
The number of
shares of Common Stock outstanding as of April 3, 2009 was 3,000.
NTK
HOLDINGS, INC. AND SUBSIDIARIES
December
31, 2008
PART
I
Item
1. Business.
NTK Holdings, Inc. (“NTK Holdings”) is a
Delaware corporation that was formed to hold the
capital stock of Nortek Holdings, Inc. (“Nortek Holdings”), which holds the
capital stock of Nortek, Inc. (“Nortek”). NTK Holdings became the
parent company of Nortek Holdings on February 10, 2005. As used in this report, the
term “Company” refers to NTK Holdings, Inc., together with its subsidiaries,
unless the context indicates otherwise. The term “Company” is used
for convenience only and is not intended as a precise description of any of the
separate corporations, each of which manages its own affairs.
General
The Company is a
leading diversified manufacturer of innovative, branded residential and
commercial building products, operating within four reporting
segments:
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the
Residential Ventilation Products (“RVP”)
segment,
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the Home
Technology Products (“HTP”)
segment,
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the
Residential Air Conditioning and Heating Products (“Residential HVAC“)
segment and
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the
Commercial Air Conditioning and Heating Products (“Commercial HVAC“)
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 professional remodeling
and replacement markets, the residential and commercial construction markets,
the manufactured housing market and the do-it-yourself, or DIY,
market.
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.
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 9 of the Notes to the Consolidated Financial Statements,
Item 8 of Part II of this report, incorporated herein by reference.
The
Company’s Business Segments
During 2008, the Company changed the
composition of its reporting segments to reflect the Residential HVAC segment
separately. In accordance with Statement of Financial Standards
(“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company
has restated prior period segment disclosures to conform to the new
composition.
Residential
Ventilation Products Segment
The Company’s
Residential Ventilation Products segment primarily manufactures and distributes
room and whole house ventilation products and other products primarily for the
professional remodeling and replacement markets, residential new construction
market and DIY market. The principal products of the segment, which
are sold under the Broan®, NuTone®, Venmar®, Best® and Zephyr® brand names,
among others, are:
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exhaust fans
(such as bath fans and fan, heater and light combination units),
and
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indoor air
quality products.
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The Company is one
of the world’s largest suppliers of residential range hoods and exhaust fans,
and is the largest supplier of these products in North America. The
Company is also one of the leading suppliers in Europe of luxury “Eurostyle”
range hoods. The Company’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
the Company offers are primarily used in bathrooms to remove odors and humidity
and include combination units, which may have lights, heaters or
both. The Company’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 Home Ventilating Institute
in the United States certifies the Company’s range hood and exhaust fan
products, as well as its indoor air quality products.
The Company’s sales
of kitchen range hoods and exhaust fans accounted for approximately 15.0% and
10.2%, respectively, of the Company’s consolidated net sales in 2008,
approximately 18.3% and 12.9%, respectively, of the Company’s consolidated net
sales in 2007 and approximately 17.9% and 14.6%, respectively, of the Company’s
consolidated net sales in 2006.
The Company is one
of the largest suppliers in North America of indoor air quality products, which
include air exchangers, as well as heat or energy recovery ventilators (HRVs or
ERVs, respectively) 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 Company also
sells powered attic ventilators, which alleviate heat built up in attic areas
and reduce 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 Company sells
other products in this segment, including among others, door chimes, medicine
cabinets, trash compactors, ceiling fans and central vacuum systems, by
leveraging its strong brand names and distribution network.
The Company sells
the products in its RVP segment to distributors and dealers of electrical and
lighting products, kitchen and bath dealers, retail home centers and private
label customers under the Broan®, NuTone®, Venmar®, Best® and Zephyr® brand
names, among others. Private label customers accounted for
approximately 24% of the net sales of this segment in 2008.
A key component of
the Company’s operating strategy for this segment 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 its 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 its
status as a low-cost producer provides the segment with a competitive
advantage.
The Company’s
primary residential ventilation products compete with many domestic and
international suppliers in various markets. The Company competes with
suppliers of competitive products primarily on the basis of quality,
distribution, delivery and price. Although the Company believes it
competes favorably with other suppliers of residential ventilation products,
some of the Company’s competitors have greater financial and marketing resources
than this segment of the Company’s business.
Product
manufacturing in the RVP segment 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, polyethylene components and
electronic components) and painting, finishing and packaging.
The Company has
moved, and is continuing to move, the production of certain of its product lines
from its facilities in the U.S., Canada and Italy to regions with lower labor
costs, such as China, Poland and Mexico. In 2008, the Company
consolidated its production of medicine cabinets from its facilities in Los
Angeles, California and Union, Illinois to its facility in Cleburne, Texas
(previously used to manufacture range hoods). As a result of these
production moves, the Company has closed its operations in Los Angeles,
California, Union, Illinois and Cincinnati, Ohio, as well as certain operations
in Italy.
The Company’s RVP
segment had 14 manufacturing plants and employed approximately 2,700 full-time
people as of December 31, 2008, of which approximately 194 are covered by
collective bargaining agreements which expire in 2011 and approximately 162 are
covered by collective bargaining agreements which expire in 2013.
Home
Technology Products Segment
The Company’s Home
Technology Products segment manufactures and distributes a broad array of
products designed to provide convenience and security for residential and
certain commercial applications. The principal products the Company
sells in this segment are:
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audio/video
distribution and control equipment,
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speakers and
subwoofers,
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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,
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lighting and
home automation controls, and
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The segment’s
audio/video distribution and control equipment products include
multi-room/multi-source amplifiers, home theater 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 theater
applications. These products are sold under the Niles®,
IntelliControl® ICS, Elan®, Via®, HomeLogic®, ATON™, SpeakerCraft®, JobSite®,
Proficient Audio Systems®, Sunfire®, Imerge®, Xantech®, M&S Systems® and
Channel Plus® brand names.
Through its 2007
acquisition of Home Logic, LLC, the segment has expanded its offering of control
equipment to include software and hardware that facilitates the control of third
party residential subsystems such as home theater, whole-house audio, climate
control, lighting, security and irrigation. These products are being
sold under the Home Logic® brand name and are being offered in conjunction with
Elan’s product offerings.
The segment’s
security and access control products include residential and certain commercial
intrusion protection systems, components for closed circuit television systems
(camera housings), garage and gate operators and devices to gain entry to
buildings and gated properties such as radio transmitters and contacts, keypads
and telephone entry systems. These products are sold under the
Linear®, GTO/PRO®, Mighty Mule®, OSCO®, Aigis®, AllStar®, IEI® and other private
label brand names, as well as Westinghouse®, which is licensed.
Other products in
this segment include power conditioners and surge protectors sold under the
Panamax® and Furman® brand names, audio/video wall mounts and fixtures sold
under the OmniMount® brand name, structured wiring products sold under the
OpenHouse® and Channel Plus® brand names, audio/video products distributing,
extending and converting signals to multiple display screens under the Magenta™
and Gefen® brand names, radio frequency control products and accessories sold
under private label agreements and lighting control products sold under the
LiteTouch® brand name.
The Company sells
the products in its HTP segment to distributors, professional installers,
electronics retailers and original equipment manufacturers. Sales of
this segment are primarily driven by replacement applications, new installations
in existing properties and the purchases of high-priced audio/video equipment
such as flat panel televisions and displays and to a lesser extent new
construction. In addition, a portion of the sales of this segment is
sold to customers in the non-residential market.
A key component to
the Company’s growth of this segment has been strategic acquisitions of
companies with similar or complementary products and distribution channel
strengths. There have been 18 acquisitions within the segment since
December 31, 2003, of which the last acquisition was consummated on July 27,
2007. 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 widely-recognized brand names with various
features and price points, which the Company believes allows it to expand its
distribution in the professional installation and retail
markets. Another key component of the Company’s operating strategy is
the introduction of new products and innovations, which capitalize on the
Company’s 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 Duchossois Industries,
Inc.). The segment competes with suppliers of competitive products
primarily on the basis of quality, distribution, delivery and
price. Although the Company believes it competes favorably with other
suppliers of home technology products, some of the Company’s competitors have
greater financial and marketing resources than this segment of the Company’s
business.
In this segment,
the Company has several administrative and distribution facilities in the United
States and a significant amount of its products are manufactured at its facility
located in China. In addition, certain products are sourced from low
cost Asian suppliers based on the Company’s specifications. The
Company believes that its Asian operations provide the Company with a
competitive cost advantage.
The Company’s HTP
segment had 8 manufacturing plants and employed approximately 2,200 full-time
people as of December 31, 2008. The Company believes that its
relationships with its employees in this segment are satisfactory.
Residential
Air Conditioning and Heating Products Segment
The Company’s
Residential Air Conditioning and Heating Products (“Residential HVAC”) segment
principally manufactures and sells split-system air conditioners, heat pumps,
air handlers, furnaces and related equipment, accessories and parts for the
residential and certain commercial markets. For site-built homes and
certain commercial structures, the segment markets its products under the
licensed brand names Frigidaire®, Tappan®, Philco®, Kelvinator®, Gibson®,
Westinghouse® and Maytag®. The segment also supplies products to
certain of its customers under the Broan®, NuTone®, Mammoth® and several private
label brand names. Within the residential market, the Company is one
of the largest suppliers of HVAC 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 demand by the replacement market will continue to exceed the demand for
products by the new installation market as a large number of previously
installed heating and cooling products become outdated or reach the end of their
useful lives. The market for residential cooling products, including
those the segment sells into, 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 its ability to offer
both heating and cooling products helps offset the effects of seasonality on
this 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, or 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 it has one major competitor in
the manufactured housing furnace market, York International Corporation (a
subsidiary of Johnson Controls, Inc.) which markets its products primarily under
the “Coleman” name. The segment competes with most major industry
manufacturers in the manufactured housing air conditioning market.
The 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.,
Trane, Inc. (formerly American Standard Companies Inc.), York International
Corporation (a subsidiary of Johnson Controls, Inc.) and Goodman Global,
Inc. In 2008, the Company estimates that approximately 58% of this
segment’s sales of residential HVAC products were attributable to the
replacement market, which tends to be less cyclical than the new construction
market.
In addition, the
segment sells residential HVAC products outside of North America, with sales
concentrated primarily in Latin America and the Middle
East. International sales consist of not only the segment’s
manufactured products, but also products manufactured to specification by
outside sources. The products are sold under the Westinghouse®
licensed brand name, the segment’s own Miller® brand name, as well as other
private label brand names.
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 it competes favorably with
respect to certain of these factors, most of the segment’s competitors have
greater financial and marketing resources and the products of certain
competitors may enjoy greater brand awareness than the Company’s residential
HVAC products.
The Company’s
Residential HVAC segment had 4 manufacturing plants and employed approximately
1,500 full-time people as of December 31, 2008. The Company believes
that its relationships with its employees in this segment are
satisfactory.
Commercial
Air Conditioning and Heating Products Segment
The Company’s
Commercial Air Conditioning and Heating Products (“Commercial HVAC”) segment
manufactures and sells HVAC systems that are custom-designed to meet customer
specifications for commercial offices, manufacturing and educational facilities,
hospitals, retail stores, clean rooms and governmental
buildings. These 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 tons to 600 tons. The segment markets its commercial HVAC products
under the Governair®, Mammoth®, Temtrol®, Venmar CES™, Ventrol®, Webco™,
Huntair®, Cleanpak™ and Fanwall® brand names. The Company’s
subsidiary, Eaton-Williams Group Limited, 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, such as the Company. 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, clean rooms and governmental buildings. The
segment seeks to maintain, as well as establish and develop, 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 its custom-designed equipment.
In 2008, the
Company estimates that approximately 25% of its air conditioning and heating
product commercial sales 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 HVAC products are marketed through independently owned manufacturers’
representatives and approximately 280 sales, marketing and engineering
professionals as of December 31, 2008. 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 it competes.
The Company
believes that it 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 Trane,
Inc. 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 it competes favorably with
respect to some of these factors, most of its competitors have greater financial
and marketing resources than this segment of the Company’s business and enjoy
greater brand awareness. However, the Company believes that its
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 Company’s
Commercial HVAC segment had 12 manufacturing plants and employed approximately
2,400 full-time people at December 31, 2008, of which approximately 186 are
covered by collective bargaining agreements which expire in 2009 and
approximately 159 are covered by collective bargaining agreements which expire
in 2011.
Backlog
Backlog expected to
be filled within the next twelve months as of December 31, 2008 was
approximately $260.5 million and was approximately $263.1 million as of December
31, 2007. The decrease in backlog from December 31, 2007 to December
31, 2008 reflects a reduction in backlog for residential ventilation, home
technology and residential HVAC products of approximately $31.9 million,
partially offset by an increase in backlog serving commercial HVAC customers of
approximately $29.3 million.
Backlog is not
regarded as a significant factor for operations where orders are generally for
prompt delivery. While backlog stated for all periods 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, and therefore there can be no assurance that
the Company’s backlog will result in actual revenues.
Raw
Materials
The Company
purchases raw materials and most components used in its various manufacturing
processes. The principal raw materials the Company purchases are
rolled sheet steel, formed and galvanized steel, copper, aluminum, plate mirror
glass, various chemicals, paints, plastics, motors and compressors.
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 Company believes that the use of these 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.
Research
and Development
The Company’s
research and development activities are principally for new product development
and represent approximately 2.5%, 2.4% and 2.0% of the Company’s consolidated
net sales in 2008, 2007 and 2006, respectively.
Trademarks
and Patents
The Company owns or
licenses numerous trademarks that it uses in the marketing of its
products. Certain of the trademarks the Company owns, including
Broan® and NuTone®, are particularly important in the marketing of its
products. The Company also holds numerous design and process patents,
but no single patent is material to the overall conduct of the Company’s
business. It is the Company’s policy to obtain and protect patents
whenever such action would be beneficial to it.
Environmental
and Regulatory Matters
The Company is
subject to numerous federal, state, local and foreign laws and regulations
relating to protection of the environment, including those that impose
limitations on the discharge of pollutants into the air and water, establish
standards for the use, treatment, storage and disposal of solid and hazardous
materials and wastes and govern the cleanup of contaminated
sites. The Company believes that it is in substantial compliance with
the material laws and regulations applicable to it. The Company is
involved in current, and may become involved in future, remedial actions under
federal and state environmental laws and regulations which impose liability on
companies to clean up, or contribute to the cost of cleaning up, sites currently
or formerly owned or operated by such companies or sites at which their
hazardous wastes or materials were disposed of or released. Such
claims may relate to properties or business lines acquired by the Company after
a release has occurred. In other instances, the Company may be
partially liable under law or contract to other parties that have acquired
businesses or assets from the Company for past practices relating to hazardous
materials or wastes. Expenditures in 2008, 2007 and 2006 to evaluate
and remediate such sites were not material. While the Company is able
to reasonably estimate certain of its contingent losses, the Company is unable
to estimate with certainty its ultimate financial exposure in connection with
identified or yet to be identified remedial actions due, among other reasons,
to: (i) uncertainties surrounding the nature and application of current or
future environmental regulations, (ii) the Company’s lack of information about
additional sites to which it may be listed as a potentially responsible party,
or PRP, (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and (iv)
the time periods over which remediation may occur. Furthermore, since
liability for site remediation may be joint and several, each PRP is potentially
wholly liable for other PRPs that become insolvent or bankrupt. Thus,
the solvency of other PRPs could directly affect the Company’s ultimate
aggregate clean-up costs. In certain circumstances, the Company’s
liability for clean-up costs may be covered in whole or in part by insurance or
indemnification obligations of third parties.
The Company’s HVAC
products must be designed and manufactured to meet various regulatory
standards. The United States and other countries have implemented a
protocol on ozone-depleting substances that limits its ability to use
hydrochlorofluorocarbons (“HCFCs”), a refrigerant used in air conditioning and
heat pump products. In accordance with recently enacted regulations,
beginning on January 1, 2010, all of the Company’s HVAC products must be
manufactured with R410 refrigerant instead of R22. In addition, the
Company’s residential HVAC products are subject to federal minimum efficiency
standards, which increased to a 13 seasonal energy efficiency ratio (“SEER”) in
2006. The Company’s residential HVAC products for manufactured
housing include furnaces which must be designed and engineered to meet certain
standards required by the U.S. Department of Housing and Urban Development and
other federal agencies. The Company must continue to improve its
products to meet these and other applicable standards as they develop and become
more stringent over time.
Employees
The Company
employed approximately 8,800 full time persons as of December 31,
2008.
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 or losses or the recognition of an asset
impairment. As agreements expire and until negotiations are
completed, the Company does not know whether it 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.
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
NTK Holdings’
periodic and current reports are available on Nortek’s 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.
Risks
Related to Our Business:
The
Company’s business is dependent upon the levels of remodeling and replacement
activity and new construction activity which have been negatively impacted by
the economic downturn and the instability of the credit markets.
Critical factors in
the level of the Company’s 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, to a lesser extent, the level of
residential remodeling and replacement activity are affected by seasonality and
cyclical factors such as interest rates, inflation, consumer spending habits,
employment levels and other macroeconomic factors, over which the Company has no
control. Any decline in economic activity as a result of these or
other factors typically results in a decline in new construction and, to a
lesser extent, residential remodeling and replacement purchases, which would
result in a decrease in the Company’s sales, profitability and cash
flows. For example, reduced levels of home sales and housing starts
and other softening in the housing markets in 2008 negatively affected the
Company’s results of operations in 2008 and these factors are expected to
continue to negatively affect the Company’s results of operations and cash flows
throughout 2009.
In addition,
uncertainties due to the significant instability in the mortgage markets and the
resultant impact on the overall credit market could continue to adversely impact
the Company’s business. The tightening of credit standards and the
decrease in home values are expected to result in a decline in consumer spending
for home remodeling and replacement projects which could adversely impact the
Company’s operating results. Additionally, increases in the cost of
home mortgages and the difficulty in obtaining financing for new homes could
continue to materially impact the sales of the Company’s products in the
residential construction market.
Fluctuations
in the cost or availability of raw materials and components and increases in
freight and other costs could have an adverse effect on the Company’s
business.
The Company is
dependent upon raw materials and purchased components, including, among others,
steel, motors, compressors, copper, packaging material, aluminum, plastics,
glass and various chemicals and paints that it purchases from third
parties. As a result, the Company’s results of operations, cash flows
and financial condition may be adversely affected by increases in costs of raw
materials or components, or in limited availability of raw materials or
components. The Company does not typically enter into long-term
supply contracts for raw materials and components. In addition, the
Company generally does not hedge against its supply
requirements. Accordingly, the Company may not be able to obtain raw
materials and components from its current or alternative suppliers at reasonable
prices in the future, or may not be able to obtain raw materials and components
on the scale and within the time frames the Company
requires. Further, if the Company’s suppliers are unable to meet the
Company’s supply requirements, the Company could experience supply interruptions
and/or cost increases which (to the extent the Company was unable to find
alternate suppliers or pass along these additional costs to its customers) could
adversely affect the Company’s results of operations, cash flows and financial
condition.
For example, during
2006 through 2008, the Company experienced significant increases in the prices
it paid for steel, copper, aluminum and steel fabricated parts. In
addition, the Company has experienced and may continue to experience an increase
in freight and other costs due to rising oil and other energy
prices. While the Company was able to offset a portion of these cost
increases in these periods by raising prices to its customers for some products,
as well as through strategic sourcing initiatives and improvements in
manufacturing efficiency, there can be no assurance that the Company will be
able to offset all material cost increases in 2009 or in any future
periods.
The availability of certain raw
materials and component parts from sole or limited sources of supply may have an
adverse effect on the Company’s business.
Sources of raw materials or component
parts for certain of the Company’s operations may be dependent upon limited or
sole sources of supply which may impact the Company’s ability to manufacture
finished product. While the Company continually reviews alternative
sources of supply, there can be no assurance that the Company will not face
disruptions in sources of supply which could adversely affect the Company’s
results of operations, cash flows and financial position.
Weather
fluctuations may negatively impact the Company’s business.
Weather
fluctuations may adversely affect the Company’s operating results and its
ability to maintain sales volume. In the Company’s HVAC segment,
operations may be adversely affected by unseasonably warm weather in the months
of November to February and unseasonably cool weather in the months of May to
August, which has the effect of diminishing customer demand for heating and air
conditioning products. In all of the Company’s segments, adverse
weather conditions at any time of the year may negatively affect overall levels
of new construction and remodeling and replacement activity, which in turn may
lead to a decrease in sales. Many of the Company’s operating expenses
are fixed and cannot be reduced during periods of decreased demand for its
products. Accordingly, the Company’s results of operations and cash
flows will be negatively impacted in quarters with lower sales due to weather
fluctuations.
If
the Company fails to identify suitable acquisition candidates, or 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, and those
acquisitions have contributed significantly to the Company’s growth in sales and
profitability, particularly in the HTP segment. However, the Company
cannot assure that it will continue to locate and secure acquisition candidates
on terms and conditions that are acceptable to the Company. If the
Company is unable to identify attractive acquisition candidates, its growth,
particularly in the HTP segment, could be impaired.
There are several
risks in acquisitions, including:
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the
difficulty and expense that the Company incurs in connection with the
acquisition;
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the
difficulty and expense that the Company incurs in the subsequent
assimilation of the operations of the acquired company into the Company’s
operations;
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adverse
accounting consequences of conforming the acquired company's accounting
policies to the Company’s;
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the
difficulties and expense of developing, implementing and monitoring
systems of internal controls at acquired companies, including disclosure
controls and procedures and internal controls over financial
reporting;
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the
difficulty in operating acquired
businesses;
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the diversion
of management's attention from the Company’s other business
concerns;
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the potential
loss of customers or key employees of acquired
companies;
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the impact on
the Company’s financial condition due to the timing of the acquisition or
the failure to meet operating expectations for the acquired business;
and
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the
assumption of unknown liabilities of the acquired
company.
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The Company cannot
assure that any acquisition it has made or may make will be successfully
integrated into the Company’s on-going operations or that the Company will
achieve any expected cost savings from any acquisition. If the
operations of an acquired business do not meet expectations, the Company’s
profitability and cash flows may be impaired and 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. The Company does not expect to
consummate any acquisitions in 2009.
Because
the Company competes against competitors with substantially greater resources,
the Company faces external competitive risks that may negatively impact its
business.
The Company’s RVP
and HTP segments compete with many domestic and international suppliers in
various markets. The Company competes with suppliers of competitive
products primarily on the basis of quality, distribution, delivery and
price. Some of the Company’s competitors in these markets have
greater financial and marketing resources than that of the Company.
The Company’s
Residential HVAC segment competes in both the site-built and manufactured
housing markets on the basis of breadth and quality of product line,
distribution, product availability and price. Most of the Company’s residential
HVAC competitors have greater financial and marketing resources and the products
of certain of the Company’s competitors may enjoy greater brand awareness than
the Company’s residential HVAC products.
The Company’s
Commercial HVAC segment competes primarily on the basis of engineering support,
quality, design and construction flexibility and total installed system
cost. Most of the Company’s competitors in the commercial HVAC market
have greater financial and marketing resources and enjoy greater brand awareness
than the Company does.
Competitive factors
could require the Company to reduce prices or increase spending on product
development, marketing and sales, either of which could adversely affect its
operating results.
Fluctuations
in currency exchange rates could adversely affect the Company’s revenues,
profitability and cash flows.
The Company’s
foreign operations expose the Company to fluctuations in currency exchange rates
and currency devaluations. The Company reports its financial results
in U.S. dollars, but a portion of its sales and expenses are denominated in
Euros, Canadian Dollars and other currencies. As a result, changes in
the relative values of U.S. dollars, Euros, Canadian Dollars and other
currencies will affect the Company’s levels of revenues and
profitability. If the value of the U.S. dollar increases relative to
the value of the Euro, Canadian Dollar and other currencies, the Company’s
levels of revenue and profitability will decline since the translation of a
certain number of Euros or units of such other currencies into U.S. dollars for
financial reporting purposes will represent fewer U.S.
dollars. Conversely, if the value of the U.S. dollar decreases
relative to the value of the Euro, Canadian Dollar and other currencies, the
Company’s levels of revenue and profitability will increase since the
translation of a certain number of Euros or units of such other currencies into
U.S. dollars for financial reporting purposes will represent additional U.S.
dollars. In addition, in the case of sales to customers in certain
locations, the Company’s sales are denominated in U.S. dollars, Euros or
Canadian Dollars but all or a substantial portion of the Company’s associated
costs are denominated in a different currency. As a result, changes
in the relative values of U.S. dollars, Euros and Canadian Dollars and any such
different currency will affect the Company’s profitability and cash
flows.
Because
the Company has substantial operations outside the United States, the Company is
subject to the economic and political conditions of foreign
nations.
The Company has
manufacturing facilities in several countries outside of the United
States. In 2008, the Company sold products in approximately 100
countries other than the United States. Foreign net sales, which are
attributed based upon the location of the Company’s subsidiary responsible for
the sale, were approximately 21.2% and 21.5% of consolidated net sales for the
years ended December 31, 2008 and 2007, respectively. The Company’s
foreign operations are subject to a number of risks and uncertainties, including
risks that:
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foreign
governments may impose limitations on the Company’s ability to repatriate
funds;
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foreign
governments may impose withholding or other taxes on remittances and other
payments to the Company, or the amount of any such taxes may
increase;
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an outbreak
or escalation of any insurrection, armed conflict or act of terrorism, or
another form of political instability, may
occur;
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natural
disasters may occur, and local governments may have difficulties in
responding to these events;
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foreign
governments may nationalize foreign assets or engage in other forms of
governmental protectionism;
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foreign
governments may impose or increase investment barriers, customs or
tariffs, or other restrictions affecting the Company’s business;
and
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development,
implementation and monitoring of systems of internal controls of the
Company’s international operations, including disclosure controls and
procedures and internal controls over financial reporting, may be
difficult and expensive.
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The occurrence of
any of these conditions could disrupt the Company’s business in particular
countries or regions of the world, or prevent the Company from conducting
business in particular countries or regions, which could reduce sales and
adversely affect profitability. In addition, NTK Holdings relies on
dividends and other payments or distributions from its subsidiaries to meet its
debt obligations. If foreign governments impose limitations on the
Company’s ability to repatriate funds or impose or increase taxes on remittances
or other payments to the Company, the amount of dividends and other
distributions NTK Holdings receives from its subsidiaries could be reduced,
which could reduce the amount of cash available to NTK Holdings to meet its debt
obligations.
Varying
international business practices.
The Company
currently purchases raw materials, components and finished products from various
foreign suppliers. To the extent that any such foreign
supplier utilizes labor or other practices that vary from those commonly
accepted in the United
States, the Company’s
business and reputation could be adversely affected by any resulting litigation,
negative publicity, political pressure or otherwise.
A
decline in the Company’s relations with its key distributors and dealers or loss
of major customers may negatively impact the Company’s business.
The Company’s
operations depend upon its ability to maintain relations with its independent
distributors and dealers and the Company does not typically enter into long-term
contracts with them. If the Company’s key distributors or dealers are
unwilling to continue to sell the Company’s products, or if any of them merge
with or are purchased by a competitor, the Company could experience a decline in
sales. If the Company is unable to replace such distributors or
dealers or otherwise replace the resulting loss of sales, the Company’s
business, results of operations and cash flows could be adversely
affected. For the year ended December 31, 2008, approximately 50% of
the Company’s consolidated net sales were made through its independent
distributors and dealers, and the Company’s largest distributor or dealer
accounted for approximately 4% of consolidated net sales for the year ended
December 31, 2008.
In addition, the
loss of one or more of the Company’s other major customers, or a substantial
decrease in such customers' purchases from the Company, could have a material
adverse effect on results of operations and cash flows. Because the
Company does not generally have binding long-term purchasing agreements with its
customers, there can be no assurance that the Company’s existing customers will
continue to purchase products from the Company. The Company’s largest
customer (other than a distributor or dealer) accounted for approximately 4% of
consolidated net sales for the year ended December 31, 2008.
Labor
disruptions or cost increases could adversely affect the Company’s
business.
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 employment terms (including the collective
bargaining agreements affecting the Company’s unionized employees) could result
in material gains or losses or the recognition of an asset
impairment. As collective bargaining agreements expire and 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, without production interruptions,
including labor stoppages. At December 31, 2008, approximately 8% of
the Company’s employees are unionized, and from time to time the Company
experiences union organizing efforts directed at the Company’s non-union
employees. The Company may also experience labor cost increases or
disruptions in its non-union facilities in circumstances where the Company must
compete for employees with necessary skills and experience or in tight labor
markets.
The
Company must continue to innovate and improve its products to maintain its
competitive advantage.
The Company’s
ability to maintain and grow its market share depends on the ability to continue
to develop high quality, innovative products. An important part of
the Company’s competitive strategy includes leveraging its distributor and
dealer relationships and its existing brands to introduce new
products. In addition, some of the Company’s HVAC products are
subject to federal minimum efficiency standards and/or protocols concerning the
use of ozone-depleting substances that have and are expected to continue to
become more stringent over time. The Company cannot assure that its
investments in product innovation and technological development will be
sufficient or that it will be able to create and market new products to enable
the Company to successfully compete with new products or technologies developed
by the Company’s competitors, or meet heightened regulatory requirements in the
future.
The
Company could incur substantial costs, including cleanup costs, fines and civil
or criminal sanctions, as a result of violations of or liabilities under
environmental laws.
The Company’s
operations are subject to numerous federal, state, local and foreign laws and
regulations relating to protection of the environment, including those that
impose limitations on the discharge of pollutants into the air and water,
establish standards for the use, treatment, storage and disposal of solid and
hazardous materials and wastes and govern the cleanup of contaminated
sites. The Company has used and continues to use various substances
in its products and manufacturing operations, and has generated and continues to
generate wastes, 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. These laws and regulations affect ongoing operations and
require capital costs and operating expenditures in order to achieve and
maintain compliance. For example, the United States and other
countries have established programs for limiting the production, importation and
use of certain ozone depleting chemicals, including HCFCs, a refrigerant used in
the Company’s air conditioning and heat pump products. Some of these
chemicals have been banned completely, and others are currently scheduled to be
phased out in the United States by the year 2010. Modifications to
the design of the Company’s products may be necessary in order to utilize
alternative refrigerants.
In addition, the
Company could incur substantial costs, including cleanup costs, fines and civil
or criminal sanctions, and third party property damage or personal injury
claims, as a result of violations of or liabilities under environmental laws, or
non-compliance with environmental permits required at its
facilities. Certain environmental 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 the Company’s predecessors, or at locations to
which current or former operations or those of the Company’s predecessors have
shipped waste for disposal. Contaminants have been detected at
certain of the Company’s former sites, and the Company has been named as a
potentially responsible party at several third-party waste disposal
sites. While the Company is not currently aware of any such sites as
to which material outstanding claims or obligations exist, the discovery of
additional contaminants or the imposition of additional cleanup obligations at
these or other sites could result in significant liability. In
addition, 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 the
Company’s business, financial condition, results of operations and cash
flows.
The
Company faces risks of litigation and liability claims on 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, results of operations and cash
flows.
The Company is
subject to legal proceedings and claims arising out of its businesses that cover
a wide range of matters, including contract and employment claims, product
liability claims, warranty claims and claims for modification, adjustment or
replacement of component parts of units sold. Product liability and
other legal proceedings include those related to businesses the Company has
acquired or properties it has previously owned or operated.
The development,
manufacture, sale and use of the Company’s products involve risks of product
liability and warranty claims, including personal injury and property damage
arising from fire, soot, mold and carbon monoxide. The Company
currently carries insurance and maintains reserves for potential product
liability claims. However, the Company’s insurance coverage may be
inadequate if such claims do arise and any liability not covered by insurance
could have a material adverse effect on the Company’s business. The
accounting for self-insured plans requires that significant judgments and
estimates be made both with respect to the future liabilities to be paid for
known claims and incurred but not reported claims as of the reporting
date. To date, the Company has been able to obtain insurance in
amounts it believes to be appropriate to cover such
liability. However, the Company’s insurance premiums may increase in
the future as a consequence of conditions in the insurance business generally or
the Company’s situation in particular. Any such increase could result
in lower profits or cause the need to reduce the Company’s insurance
coverage. In addition, a future claim may be brought against the
Company which would have a material adverse effect on the
Company. Any product liability claim may also include the imposition
of punitive damages, the award of which, pursuant to certain state laws, may not
be covered by insurance. The Company’s product liability insurance
policies have limits that, if exceeded, may result in material costs that would
have an adverse effect on future profitability. In addition, warranty
claims are generally not covered by the Company’s product liability
insurance. Further, any product liability or warranty issues may
adversely affect the Company’s reputation as a manufacturer of high-quality,
safe products and could have a material adverse effect on its
business.
Product
recalls or reworks may adversely affect the Company’s business.
In the event the
Company produces a product that is alleged to contain a design or manufacturing
defect, the Company could be required to incur costs involved to recall or
rework that product. While the Company has undertaken several
voluntary product recalls and reworks over the past several years, additional
product recalls and reworks could result in material costs. Many of
the Company’s products, especially certain models of bath fans, range hoods and
residential furnaces and air conditioners, have a large installed base, and any
recalls and reworks related to products with a large installed base could be
particularly costly. The costs of product recalls and reworks are not
generally covered by insurance. In addition, the Company’s reputation
for safety and quality is essential to maintaining its market share and
protecting its brands. Any recalls or reworks may adversely affect
the Company’s reputation as a manufacturer of high-quality, safe products and
could have a material adverse effect on its financial condition, results of
operations and cash flows.
The
Company’s business operations could be significantly disrupted if it 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 NTK Holdings’ Chairman and Chief Executive Officer, Richard L.
Bready, and the Company’s other executive officers, could prevent the Company
from executing its business strategy.
The
Company’s business operations could be negatively impacted if it fails to
adequately protect its intellectual property rights, if it fails to comply with
the terms of its licenses or if third parties claim that the Company is in
violation of its intellectual property rights.
The Company is
highly dependent on certain of the brand names under which it sells its
products, including Broan® and NuTone®. Failure to protect these
brand names and other intellectual property rights or to prevent their
unauthorized use by third parties could adversely affect the Company’s
business. The Company seeks to protect its intellectual property
rights through a combination of trademark, copyright, patent and trade secret
laws, as well as confidentiality agreements. These protections may
not be adequate to prevent competitors from using the Company’s brand names and
trademarks without authorization or from copying the Company’s products or
developing products equivalent to or superior to the Company’s. The
Company licenses several brand names from third parties. In the event
the Company fails to comply with the terms of these licenses, the Company could
lose the right to use these brand names. In addition, the Company
faces the risk of claims that the Company is infringing third parties'
intellectual property rights. Any such claim, even if it is without
merit, could be expensive and time-consuming; could cause the Company to cease
making, using or selling certain products that incorporate the disputed
intellectual property; could require the Company to redesign its products, if
feasible; could divert management time and attention; and could require the
Company to enter into costly royalty or licensing arrangements.
Risks
Related to Our Capital Structure:
The
Company’s substantial debt could negatively impact its business, prevent the
Company from fulfilling its outstanding debt obligations and adversely affect
its financial condition.
The Company has a substantial amount of
debt. At December 31, 2008, the Company had approximately
$2,233.8 million of total debt
outstanding. The terms of the Company’s outstanding debt, including
NTK Holdings’ 10 3/4% Senior Discount Notes due 2014, NTK Holdings’ senior
unsecured loan facility due 2014, Nortek’s 10% Senior Secured Notes due 2013,
Nortek’s 8 1/2% Senior Subordinated Notes due 2014 and Nortek’s $350.0 million senior secured
asset-based revolving credit facility (the “ABL Facility”) limit, but do not prohibit, the Company
from incurring additional debt. If additional debt is added to
current debt levels, the related risks described below could
intensify.
The substantial amount of the Company’s
debt has or could have important consequences, including the
following:
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the Company’s ability to obtain
additional financing for working capital, capital expenditures,
acquisitions, refinancing indebtedness, or other purposes is
impaired;
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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;
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the Company is more leveraged than some of its
competitors, which may result in a competitive
disadvantage;
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the Company is vulnerable to interest rate
increases, as certain of its borrowings, including those under Nortek’s
ABL Facility, are at variable
rates;
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the Company’s failure to comply
with the restrictions
in its financing agreements would have a material adverse
effect on it;
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the Company’s significant amount
of debt makes it more vulnerable to changes in
general economic
conditions;
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the Company faces limitations on its ability
to make strategic
acquisitions, invest in new products or capital assets or take advantage of business
opportunities; and
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the Company is limited in its flexibility in
planning for, or reacting to, changes in its business and the industries
in which it operates.
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The Company believes that it will need
to access the capital markets in the future to raise the funds to repay its
substantial debt. In April 2009, Moody’s downgraded the debt
ratings for Nortek and NTK Holdings from “B3” to “Caa2” and issued a negative
outlook. Moody’s rating downgrade reflected the Company’s high
leverage, reduced financial flexibility and the anticipated pressure of the
difficult new home construction market and home values on the Company’s 2009
financial performance. The negative ratings outlook reflected Moody’s
concern that the market for the Company’s products will remain under significant
pressure so long as new housing starts do not rebound and that the repair and
remodeling market could contract further in 2009. Additionally,
Moody’s was concerned whether the Company’s cost cutting initiatives would be
successful enough to offset pressure on the Company’s sales. The current
debt ratings, and any further future rating agency downgrades in the Company's
indebtedness, could impede its ability to refinance indebtedness or adversely
impact future borrowing costs.
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 high levels of debt relative to its financial performance
and the restrictions under
its debt agreements. If the Company is unable to satisfy or refinance
its indebtedness as it comes due, the Company will be in default on its debt
obligations. If the Company defaults on its debt obligations and any
of its indebtedness is accelerated, such acceleration will have a material
adverse effect on the Company’s financial condition and cash
flows.
See also
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources” included elsewhere herein for a
further description of the terms and conditions of the Company’s outstanding
indebtedness.
The
Company may be unable to generate sufficient cash to service all of its
indebtedness and other liquidity requirements and may be forced to take other
actions to satisfy such requirements, which may not be successful.
The Company has
significant cash payments due on its indebtedness and certain other specified
obligations in 2009 and thereafter. For the year ending December 31,
2009, no such payments are due by NTK Holdings, but Nortek and its subsidiaries
owe principal and interest payments on its indebtedness in the total amount of
approximately $164.5 million. In the fiscal year ending December 31,
2010, the total of such principal and interest payments, including payments owed
by NTK Holdings, is approximately $308.9 million. For a description
of the obligations to which the payments referred to in this paragraph relate
and the amount of the payments due on such obligations after December 31, 2010,
see the table in “Liquidity and Capital Resources” included elsewhere
herein.
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 are subject to prevailing economic and
competitive conditions and to financial, business and other factors beyond the
Company’s control. If the subsidiaries’ cash flows and
capital resources are insufficient to fund the Company’s debt service
obligations, the Company could face substantial liquidity problems and
may be forced to seek additional capital or restructure
or refinance the Company’s indebtedness and its subsidiaries may be forced to
reduce or delay capital expenditures and sell assets. In addition, the Company may seek to reduce its debt service obligations
through the retirement or purchase of outstanding debt through cash purchases,
prepayments and/or exchanges in open market purchases, privately negotiated
transactions or otherwise. These alternative measures may not be
successful and may not permit the Company to meet its scheduled debt service
obligations.
Under
the terms of its indebtedness, Nortek has limited capacity to make certain
payments, including dividends, to NTK Holdings.
Nortek’s 10% Senior Secured Notes due
2013, 8 1/2% Senior Subordinated Notes due
2014 and ABL Facility limit Nortek’s ability to make certain payments, including
dividends, to NTK
Holdings. The amount of the permitted payments
depends in part on baskets which are available only if Nortek meets certain
financial tests. No assurance can be given that Nortek will have
sufficient capacity under these limitations to make payments to NTK Holdings to
enable it to satisfy its debt service obligations. At December 31, 2008, Nortek had the
capacity under the terms of
its existing indebtedness to make certain payments, including
dividends, of up to approximately $145.9 million to NTK Holdings.
NTK
Holdings has significant cash payments due on its indebtedness beginning in the
fiscal year ending December 31, 2010, and the Company’s financial condition and
level of operating performance may impair the ability of NTK Holdings to make
such payments.
Although NTK
Holdings has no cash payments due on its outstanding indebtedness or other
liquidity needs in 2009, NTK Holdings has substantial debt service obligations
beginning in the fiscal year ending December 31, 2010. During 2010,
NTK Holdings alone has cash debt service obligations of approximately $162.3
million, including a payment of approximately $147.4 million due on March 1,
2010 under its 10 3/4% Senior Discount Notes.
The ability of NTK Holdings to service
its outstanding indebtedness depends on the likelihood of obtaining additional
capital, restructuring the terms of such indebtedness or obtaining dividends or
other payments from Nortek. The ability of NTK Holdings to obtain
additional capital is adversely affected by the substantial amount of the
Company’s outstanding indebtedness, including indebtedness of Nortek, which is
structurally senior in right of payment to any new debt or equity financing for
NTK Holdings. The ability of NTK Holdings to obtain dividends or
other payments from Nortek is constrained by the financial condition and
operating performance of Nortek and its subsidiaries and by the limitations on
making such distributions and other payments contained in the terms of Nortek’s
outstanding indebtedness.
Nortek is under no
obligation to make any distribution or other payment to NTK Holdings even if
Nortek has available cash and the making of such a payment is permitted by the
terms of its existing indebtedness. In light of Nortek’s own
substantial indebtedness and liquidity needs, NTK Holdings believes there is a
substantial likelihood that Nortek will choose not to make a distribution or
other payment to NTK Holdings sufficient to enable NTK Holdings to make the
payments due in 2010 on its outstanding indebtedness, including the payment due
in March 2010 under its 10 3/4% Senior Discount Notes. The failure by
NTK Holdings to make such payments will constitute events of default under the
terms of the documentation governing such indebtedness and will permit the
holders of such indebtedness to accelerate the payment of such indebtedness in
full. Such defaults, including cross defaults under NTK Holdings’
senior unsecured loan facility, and any related acceleration will likely require
additional equity or a restructuring of the indebtedness, whether pursuant to
privately negotiated transactions or under supervision of an appropriate court
proceeding.
A restructuring of
the indebtedness of NTK Holdings could result in a change of control of
Nortek. A change
of control may constitute an event of default under Nortek’s ABL Facility and
would also require Nortek to offer to purchase its 10% Senior Secured Notes due 2013 and
8 1/2% Senior Subordinated
Notes due 2014 at 101% of the principal amount thereof, together with
accrued and unpaid interest, and a default of Nortek’s ABL Facility would
trigger a cross-default of the indentures. The failure of Nortek to
complete the purchase of any notes tendered pursuant to such offer, whether due
to lack of funds or otherwise, would constitute an event of default under the
indentures governing such notes. See the next risk factor below for a
description of certain consequences which may result from events of default
under Nortek’s ABL Facility and such indentures.
The
terms of the Company’s debt covenants could limit how the Company conducts its
business and its ability to raise additional funds.
The agreements that govern the terms of
the Company’s debt, including the indentures that govern NTK Holdings’ 10 3/4%
Senior Discount Notes due 2014, NTK Holdings’ senior unsecured loan facility due
2014, Nortek’s 10% Senior Secured Notes due 2013 and Nortek’s 8 1/2% Senior
Subordinated Notes due 2014 and the credit agreement that governs Nortek’s ABL
Facility, contain covenants that restrict Nortek's ability and the ability
of its subsidiaries to:
|
·
|
incur additional
indebtedness;
|
|
·
|
pay dividends or make other
distributions;
|
|
·
|
make loans or
investments;
|
|
·
|
enter into transactions with
affiliates; and
|
|
·
|
consolidate, merge or sell
assets.
|
There are limitations on Nortek’s ability to incur the full $350.0
million of commitments under Nortek’s ABL Facility. Availability is
limited to the lesser of the borrowing base and $350.0 million, and the
covenants under Nortek’s 8 1/2% Senior Subordinated Notes due 2014 do not
currently allow Nortek to incur up to the full $350.0
million. As of
December 31, 2008, Nortek had $145.0 million outstanding under the ABL Facility
and additional borrowing capacity under the ABL Facility of approximately $69.0
million.
Nortek will be
required to deposit cash from its material deposit accounts (including all
concentration accounts) daily in collection accounts maintained with the
administrative agent under Nortek’s ABL Facility, which will be used to repay
outstanding loans and cash collateralize letters of credit if (i) excess
availability (as defined) is less than 15% of the lesser of the commitment
amount and the borrowing base or (ii) an event of default has occurred and is
continuing. In
addition, under Nortek’s ABL Facility, if Nortek’s borrowing availability falls below
the greater of (i) $40 million and (ii) 12.5% of the borrowing base,
Nortek will be required to satisfy and
maintain a fixed charge coverage ratio not less than 1.1 to
1.0. Nortek’s
ability to meet the required fixed charge coverage ratio can be affected by
events beyond the Company’s control. A breach of any of these
covenants could result in a default under Nortek’s ABL
Facility.
Moreover, Nortek’s ABL Facility provides
the lenders considerable discretion to impose reserves or availability blocks,
which could materially impair the amount of borrowings that would otherwise be
available to the Company. There can be no assurance that the lenders
under Nortek’s ABL Facility will not impose such actions during the term of the
ABL Facility and further, were they to do so, the resulting impact of this
action could materially and adversely impair the Company’s ability to
service its outstanding
indebtedness.
A breach of the covenants under the
indentures that govern NTK Holdings’ 10 3/4% Senior Discount Notes due 2014, NTK
Holdings’ senior unsecured loan facility due 2014, Nortek’s 10% Senior Secured
Notes due 2013 and Nortek’s 8 1/2% Senior Subordinated Notes due 2014 and the
credit agreement that governs Nortek’s ABL Facility could result in an event of
default under the applicable indebtedness. Such default may allow the
creditors 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 Nortek’s ABL Facility
would permit the lenders under the ABL Facility 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 Nortek’s ABL
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 its borrowings, the Company cannot
assure that the Company and its subsidiaries would have sufficient
assets to repay such
indebtedness and any assets of Nortek and its subsidiaries would be available to
repay the indebtedness of Nortek and its subsidiaries before being available to
repay the indebtedness of NTK Holdings.
If
NTK Holdings is unable to access funds generated by its subsidiaries, including
Nortek, NTK Holdings may not be able to meet its financial
obligations.
Because NTK Holdings conducts its operations through its
subsidiaries, NTK Holdings
depends on those entities
for dividends, distributions and other payments to generate the funds necessary
to meet its financial obligations. Legal restrictions in the
United States and foreign jurisdictions applicable to
the subsidiaries of NTK
Holdings and contractual
restrictions in certain agreements governing current and future indebtedness of such
subsidiaries, as well as
the financial condition and operating requirements of such subsidiaries, may limit the ability of NTK Holdings to obtain cash from its
subsidiaries. All of the subsidiaries of NTK Holdings are separate and independent legal
entities and have no obligation whatsoever to pay any dividends, distributions
or other payments to NTK
Holdings.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Set forth below is
a brief description of the location and general character of the principal
administrative and manufacturing facilities and other material real properties
of the Company’s continuing operations, all of which the Company considers to be
in satisfactory repair. All properties are owned, except for those
indicated by an asterisk (*), which are leased under operating leases and those
with a double asterisk (**), which are leased under capital leases.
|
|
|
Approximate
|
|
|
Location (1)
|
Description
|
Square Feet
|
|
|
|
|
|
|
|
Residential
Ventilation Products Segment:
|
|
|
|
|
Hartford,
WI
|
Manufacturing/Warehouse/Administrative
|
538,000
|
(3)
|
|
Hartford,
WI
|
Warehouse
|
130,000
|
*
|
|
Mississauga,
ONT, Canada
|
Manufacturing/Warehouse/Administrative
|
110,000
|
|
|
Fabriano,
Italy
|
Manufacturing/Warehouse/Administrative
|
178,000
|
|
|
Cerreto
D’Esi, Italy
|
Manufacturing/Warehouse/Administrative
|
174,000
|
|
|
Montefano,
Italy
|
Manufacturing/Warehouse/Administrative
|
93,000
|
(2)
|
|
Cleburne,
TX
|
Manufacturing/Warehouse/Administrative
|
215,000
|
(3)
|
|
Drummondville,
QUE, Canada
|
Manufacturing/Warehouse/Administrative
|
126,000
|
|
|
Drummondville,
QUE, Canada
|
Manufacturing/Warehouse/Administrative
|
44,000
|
*
|
|
Chenjian,
Huizhou, PRC
|
Manufacturing/Warehouse/Administrative/Other
|
198,000
|
|
|
San
Francisco, CA
|
Warehouse/Administrative
|
35,000
|
*
|
|
Gliwice,
Poland
|
Manufacturing/Warehouse/Administrative
|
162,000
|
(2)
|
|
Tecate,
Mexico
|
Manufacturing/Warehouse/Administrative
|
204,000
|
*
|
|
|
|
|
|
|
Home
Technology Products Segment:
|
|
|
|
|
Sylmar,
CA
|
Administrative
|
18,000
|
*
|
|
Xiang, Bao An
County, Shenzhen, PRC
|
Manufacturing/Warehouse/Administrative/Other
|
410,000
|
*
|
|
Chaiwan, Hong
Kong
|
Administrative
|
13,000
|
*
|
|
Lexington,
KY
|
Warehouse/Administrative
|
73,000
|
*
|
|
Carlsbad,
CA
|
Warehouse/Administrative
|
64,000
|
*
|
|
Vista,
CA
|
Warehouse
|
69,000
|
*
|
|
Riverside,
CA
|
Administrative
|
82,000
|
*
|
|
Casnovia,
MI
|
Manufacturing/Warehouse/Administrative
|
28,000
|
*
|
|
Phoenix,
AZ
|
Manufacturing/Warehouse/Administrative
|
51,000
|
*
|
|
Petaluma,
CA
|
Warehouse/Administrative
|
26,000
|
*
|
|
Miami,
FL
|
Warehouse/Administrative
|
43,000
|
*
|
|
Cambridge,
U.K.
|
Warehouse/Administrative
|
11,000
|
*
|
|
Tallahassee,
FL
|
Manufacturing/Warehouse/Administrative
|
71,000
|
(3)
|
|
Summerville,
SC
|
Warehouse/Administrative
|
162,000
|
*
|
|
New Milford,
CT
|
Manufacturing/Warehouse/Administrative
|
17,000
|
**
|
|
Los Angeles,
CA
|
Warehouse/Administrative
|
28,000
|
*
|
|
Salt Lake
City, UT
|
Manufacturing/Warehouse/Administrative
|
25,000
|
*
|
|
Winston-Salem,
NC
|
Manufacturing/Warehouse/Administrative
|
47,000
|
*
|
|
Canton,
MA
|
Warehouse/Administrative
|
21,000
|
*
|
|
Residential
Air Conditioning and Heating Products Segment:
|
|
|
|
|
O’Fallon,
MO
|
Warehouse/Administrative
|
70,000
|
*
|
|
St. Louis,
MO
|
Warehouse
|
103,000
|
*
|
|
Boonville,
MO
|
Manufacturing
|
250,000
|
(3)
|
|
Boonville,
MO
|
Warehouse/Administrative
|
150,000
|
(2)
|
|
Tipton,
MO
|
Manufacturing
|
50,000
|
(3)
|
|
Poplar Bluff,
MO
|
Manufacturing/Warehouse
|
725,000
|
**
|
|
Dyersburg,
TN
|
Manufacturing/Warehouse
|
368,000
|
**
|
|
Miami,
FL
|
Manufacturing/Warehouse/Administrative
|
111,000
|
*
|
|
Catano,
Puerto Rico
|
Warehouse
|
17,000
|
*
|
|
|
|
|
|
|
Commercial
Air Conditioning and Heating Products Segment:
|
|
|
|
|
St. Leonard
d’Aston, QUE, Canada
|
Manufacturing/Administrative
|
95,000
|
*
|
|
Saskatoon,
Saskatchewan, Canada
|
Manufacturing/Administrative
|
49,000
|
*
|
|
Holland,
MI
|
Manufacturing/Administrative
|
45,000
|
*
|
|
Oklahoma
City, OK
|
Manufacturing/Administrative
|
127,000
|
(3)
|
|
Okarche,
OK
|
Manufacturing/Warehouse/Administrative
|
228,000
|
(3)
|
|
Springfield,
MO
|
Manufacturing/Warehouse/Administrative
|
113,000
|
*
|
|
Anjou, QUE,
Canada
|
Manufacturing/Administrative
|
122,000
|
*
|
|
Edenbridge,
Kent, U.K.
|
Manufacturing/Administrative
|
92,000
|
*
|
|
Fenton,
Stoke-on-Trent, U.K.
|
Manufacturing/Administrative
|
104,000
|
*
|
|
Anji County,
Zhejiang, PRC
|
Manufacturing/Warehouse/Administrative
|
202,000
|
(2)
|
|
Clackamas,
OR
|
Manufacturing/Warehouse/Administrative
|
165,000
|
*
|
|
Tualatin,
OR
|
Manufacturing/Warehouse/Administrative
|
176,000
|
*
|
|
Chaska,
MN
|
Administrative
|
25,000
|
*
|
|
|
|
|
|
|
Other:
|
|
|
|
|
Providence,
RI
|
Administrative
|
23,000
|
*
|
(1)
Certain locations
may represent more than one property and the square footage includes all
properties within that location.
(2)
These
facilities are pledged as security under various subsidiary debt
agreements.
(3)
These
facilities are pledged as first priority security under Nortek’s 10% Senior
Secured Notes due 2013 and as second priority under Nortek’s ABL
Facility.
Item
3. Legal Proceedings.
The Company is
subject to numerous federal, state and local laws and regulations, including
environmental laws and regulations that impose limitations on the discharge of
pollutants into the air and water and establish standards for the treatment,
storage and disposal of solid and hazardous wastes. The Company
believes that it is in substantial compliance with the material laws and
regulations applicable to it. The Company is involved in current, and
may become involved in future, remedial actions under federal and state
environmental laws and regulations which impose liability on companies to clean
up, or contribute to the cost of cleaning up, sites at which their hazardous
wastes or materials were disposed of or released. Such claims may
relate to properties or business lines acquired by the Company after a release
has occurred. In other instances, the Company may be partially liable
under law or contract to other parties that have acquired businesses or assets
from the Company for past practices relating to hazardous substances
management. The Company believes that all such claims asserted
against it, or such obligations incurred by it, will not have a material adverse
effect upon the Company’s financial condition or results of
operations. Expenditures in 2008, 2007 and 2006 to evaluate and
remediate such sites were not material. While the Company is able to
reasonably estimate certain of its contingent losses, the Company is unable to
estimate with certainty its ultimate financial exposure in connection with
identified or yet to be identified remedial actions due, among other reasons,
to: (i) uncertainties surrounding the nature and application of environmental
regulations, (ii) the Company’s lack of information about additional sites to
which it may be listed as a potentially responsible part (“PRP”), (iii) the
level of clean-up that may be required at specific sites and choices concerning
the technologies to be applied in corrective actions and (iv) the time periods
over which remediation may occur. Furthermore, since liability for
site remediation is joint and several, each PRP is potentially wholly liable for
other PRP’s that become insolvent or bankrupt. Thus, the solvency of
other PRP’s could directly affect the Company’s ultimate aggregate clean-up
costs. In certain circumstances, the Company’s liability for clean-up
costs may be covered in whole or in part by insurance or indemnification
obligations of third parties.
In addition to
legal matters described above, the Company is named as a defendant in a number
of legal proceedings, including a number of product liability lawsuits, incident
to the conduct of its business.
The Company does
not expect that any of the above described proceedings will have a material
adverse effect, either individually or in the aggregate, on the Company’s
financial position, results of operations, liquidity or competitive
position. See Note 8 of the Notes to the Consolidated Financial
Statements, Item 8 of Part II of this report, incorporated herein by
reference.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
PART
II
Item
5. Market for Registrant’s Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
NTK Holdings’ outstanding capital stock is privately
held, and there is no established public trading market for its capital
stock. As of April 3, 2009, there were 3,000 shares of
common stock of NTK
Holdings authorized and
outstanding, all of which are owned by Investors, LLC.
Item
6. Consolidated Selected Financial Data.
See the Notes to
the Consolidated Financial Statements and Management’s Discussion and Analysis
of Financial Condition and Results of Operations, included elsewhere herein
regarding the effect on operating results of acquisitions, discontinued
operations and other matters. See Part II, Item 5 of this report,
incorporated herein by reference, for a discussion on certain Stockholder
Matters.
|
|
|
For the
Periods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Acquisition
|
|
|
Pre-Acquisition
|
|
|
|
|
For the Years Ended December
31,
|
|
|
Aug. 28, 2004
-
|
|
|
Jan.1, 2004
-
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec. 31,
2004
|
|
|
Aug. 27,
2004
|
|
|
|
|
(In millions except
ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Summary of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,269.7 |
|
|
$ |
2,368.2 |
|
|
$ |
2,218.4 |
|
|
$ |
1,959.2 |
|
|
$ |
561.0 |
|
|
$ |
1,117.9 |
|
|
Goodwill impairment charge
(1)
|
|
|
(710.0 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
Operating (loss) earnings
(2)
|
|
|
(610.1 |
) |
|
|
185.3 |
|
|
|
264.5 |
|
|
|
236.9 |
|
|
|
42.1 |
|
|
|
32.6 |
|
|
(Loss) earnings from continuing
operations
|
|
|
(844.5 |
) |
|
|
(7.0 |
) |
|
|
57.7 |
|
|
|
56.9 |
|
|
|
(3.6 |
) |
|
|
(111.3 |
) |
|
(Loss) earnings from discontinued
operations
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
(0.5 |
) |
|
|
67.4 |
|
|
Net (loss)
earnings
|
|
|
(844.5 |
) |
|
|
(7.0 |
) |
|
|
57.7 |
|
|
|
56.9 |
|
|
|
(4.1 |
) |
|
|
(43.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash, investments
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable
securities
|
|
$ |
182.2 |
|
|
$ |
53.4 |
|
|
$ |
57.4 |
|
|
$ |
77.2 |
|
|
$ |
95.0 |
|
|
$ |
202.0 |
|
|
Working
capital
|
|
|
348.3 |
|
|
|
205.7 |
|
|
|
210.2 |
|
|
|
283.6 |
|
|
|
215.8 |
|
|
|
(645.2 |
) |
|
Total
assets
|
|
|
1,983.6 |
|
|
|
2,710.8 |
|
|
|
2,635.9 |
|
|
|
2,404.6 |
|
|
|
2,264.6 |
|
|
|
1,730.3 |
|
|
Total debt
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
53.9 |
|
|
|
96.4 |
|
|
|
43.3 |
|
|
|
19.7 |
|
|
|
19.8 |
|
|
|
13.4 |
|
|
Long-term
|
|
|
2,179.9 |
|
|
|
1,921.5 |
|
|
|
1,883.2 |
|
|
|
1,628.7 |
|
|
|
1,350.2 |
|
|
|
30.4 |
|
|
Current
ratio
|
|
1.8:1
|
|
|
1.4:1
|
|
|
1.4:1
|
|
|
1.8:1
|
|
|
1.6:1
|
|
|
0.5:1
|
|
|
Debt to equity
ratio
|
|
|
--- |
|
|
22.7:1
|
|
|
26.5:1
|
|
|
8.7:1
|
|
|
4.3:1
|
|
|
0.4:1
|
|
|
Depreciation and amortization
expense,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
non-cash interest
|
|
|
142.3 |
|
|
|
132.4 |
|
|
|
108.8 |
|
|
|
75.8 |
|
|
|
26.6 |
|
|
|
50.5 |
|
|
Capital expenditures
(3)
|
|
|
25.4 |
|
|
|
36.4 |
|
|
|
42.3 |
|
|
|
33.7 |
|
|
|
15.1 |
|
|
|
12.7 |
|
|
Stockholder's (deficit)
investment
|
|
|
(813.3 |
) |
|
|
89.0 |
|
|
|
72.8 |
|
|
|
190.5 |
|
|
|
321.9 |
|
|
|
114.6 |
|
(1)
This
charge was recognized in the consolidated operating loss and net loss for
2008. See Note 1 of the Notes to the Consolidated Financial
Statements included elsewhere herein.
(2)
See
Note 12 of the Notes to the Consolidated Financial Statements included elsewhere
herein.
(3) Includes capital
expenditures financed under capital leases of approximately $4.8 million, $1.6
million, $0.9 million and $7.6 million for the year ended December 31, 2005 and
the periods from August 28, 2004 to December 31, 2004 and from January 1, 2004
to August 27, 2004, respectively. There were no expenditures financed
under capital leases for the years ended December 31, 2008, 2007 and
2006.
NTK
HOLDINGS, INC. AND SUBSIDIARIES
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
December
31, 2008
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operation.
NTK Holdings, Inc. (“NTK Holdings”) and its wholly-owned subsidiaries
(collectively with NTK
Holdings, the “Company”)
are diversified manufacturers 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 (“Residential HVAC“)
segment and
|
|
·
|
the
Commercial Air Conditioning and Heating Products (“Commercial 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 do-it-yourself
(“DIY”) market.
During 2008, the Company changed the
composition of its reporting segments to reflect the Residential HVAC segment
separately. In accordance with Statement of Financial Standards
(“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company
has restated prior period segment disclosures to conform to the new
composition.
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:
|
·
|
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 and home automation
controls, and
|
The Residential 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 air
conditioners,
|
|
·
|
furnaces and related
equipment.
|
The Commercial 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 roof top cooling and
heating products.
In the results of operations presented
below, Unallocated includes corporate related items, intersegment eliminations
and certain income and expense not allocated to its
segments.
Financial
Statement Presentation
The audited
consolidated financial statements presented herein reflect the financial
position, results of operations and cash flows of NTK Holdings. and all of its
wholly-owned subsidiaries, including Nortek, Inc (“Nortek”) (collectively, the
“Consolidated Financial Statements”). The Company has incurred a
significant amount of indebtedness. For further discussion, see
“Liquidity and Capital Resources”.
Acquisitions
The Company
accounts for acquisitions under the purchase method of accounting and
accordingly, the results of these acquisitions are included in the Company’s
consolidated results since the date of their acquisition. The Company
has made the following acquisitions since January 1, 2006:
|
Acquired Company
|
Date
of
Acquisition
|
Primary
Business
of Acquired Company
|
Reporting
Segment
|
|
|
|
|
|
|
Stilpol SP.
Zo.O.
|
September 18,
2007
|
Supply
various fabricated material components and sub-assemblies used by the
Company’s Best subsidiaries in the manufacture of kitchen range
hoods.
|
RVP
|
|
|
|
|
|
|
Metaltecnica
S.r.l.
|
September 18,
2007
|
Supply
various fabricated material components and sub-assemblies used by the
Company’s Best subsidiaries in the manufacture of kitchen range
hoods.
|
RVP
|
|
|
|
|
|
|
Triangle
|
August 1,
2007
|
Manufacture,
market and distribute bath cabinets and related products.
|
RVP
|
|
|
|
|
|
|
Home Logic,
LLC
|
July 27,
2007
|
Design and
sale of software and hardware that facilitates the control of third party
residential subsystems such as home theater, whole-house audio, climate
control, lighting, security and irrigation.
|
HTP
|
|
|
|
|
|
|
Aigis
Mechtronics, Inc.
|
July 23,
2007
|
Manufacture
and sale of equipment, such as camera housings, into the close-circuit
television portion of the global security market.
|
HTP
|
|
|
|
|
|
|
International
Electronics, Inc.
|
June 25,
2007
|
Design and
sale of security and access control components and systems for use in
residential and light commercial applications.
|
HTP
|
|
|
|
|
|
|
c.p. All Star
Corporation
|
April 10,
2007
|
Manufacture
and distribution of residential, commercial and industrial gate operators,
garage door openers, radio controls and accessory products for the garage
door and fence industry.
|
HTP
|
|
|
|
|
|
|
Par Safe /
Litewatch
|
March 26,
2007
|
Design and
sale of home safes and solar LED security lawn signs.
|
HTP
|
|
|
|
|
|
|
LiteTouch,
Inc.
|
March 2,
2007
|
Design,
manufacture and sale of automated lighting control for a variety of
applications including residential, commercial, new construction and
retro-fit.
|
HTP
|
|
|
|
|
|
|
Gefen,
Inc.
|
December 12,
2006
|
Design and
sale of audio and video products which extend, switch, distribute and
convert signals in a variety of formats, including high definition, for
both the residential and commercial markets.
|
HTP
|
|
|
|
|
|
|
Zephyr
Corporation
|
November 17,
2006
|
Design and
sale of upscale range hoods.
|
RVP
|
|
|
|
|
|
|
Pacific
Zephyr Range Hood, Inc.
|
November 17,
2006
|
Design, sale
and installation of range hoods and other kitchen products for Asian
cooking markets in the United States.
|
RVP
|
|
|
|
|
|
|
Magenta
Research, Ltd.
|
July 18,
2006
|
Design and sale of products
that distribute audio and video signals over Category 5 and fiber optic
cable to multiple display screens.
|
HTP
|
|
|
|
|
|
|
Secure
Wireless, Inc.
|
June 26,
2006
|
Design and
sale of wireless security products for the residential and commercial
markets.
|
HTP
|
|
|
|
|
|
|
Advanced
Bridging Technologies, Inc.
|
June 26,
2006
|
Design and
sale of innovative radio frequency control products and
accessories.
|
HTP
|
|
Huntair,
Inc.
|
April 14,
2006
|
Design,
manufacture and sale of custom air handlers and related products for
commercial and clean room applications.
|
HVAC
|
|
|
|
|
|
|
Cleanpak
International, LLC
|
April 14,
2006
|
Design,
manufacture and sale of custom air handlers and related products for
commercial and clean room applications.
|
HVAC
|
|
|
|
|
|
|
Furman Sound,
Inc.
|
February 22,
2006
|
Design and
sale of audio and video signal processors and innovative power
conditioning and surge protection products.
|
HTP
|
|
|
|
|
|
|
Mammoth
(Zhejiang) EG Air Conditioning Ltd. (1)
|
January 25,
2006
|
Design,
manufacture and sale of commercial HVAC products, including water source
heat pumps.
|
HVAC
|
|
|
|
|
|
|
Shanghai
Mammoth Air Conditioning Co., Ltd. (1)
|
January 25,
2006
|
Design,
manufacture and sale of commercial HVAC products, including water source
heat pumps.
|
HVAC
|
|
|
(1)
|
On January
25, 2006, the Company increased its ownership to 60%. On June
15, 2007, the Company increased this ownership from 60% to
75%. Prior to January 25, 2006, the Company did not have a
controlling interest and accounted for these investments under the equity
method of accounting. The Company is currently in negotiations
for the sale of its ownership interest in MEG and MSH. The sale
of MEG and MSH could occur as early as the second quarter of
2009.
|
Critical
Accounting Policies
The Company’s
discussion and analysis of its financial condition and results of operations are
based upon the Company’s Consolidated Financial Statements, which have been
prepared in accordance with U.S. generally accepted accounting principles on a
going concern basis. (See “Liquidity and Capital Resources” and the
Notes to the Consolidated Financial Statements included elsewhere
herein.) Certain of the Company’s 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. The Company periodically evaluates
the judgments and estimates used for its critical accounting policies to ensure
that such judgments and estimates are reasonable for its interim and year-end
reporting requirements. These judgments and estimates are based on
the Company’s historical experience, current trends and other information
available, as appropriate. If different conditions result from those
assumptions used in the Company’s judgments, the results could be materially
different from the Company’s estimates. The Company’s critical
accounting policies include:
Revenue
Recognition, Accounts Receivable and Related Expenses
The Company
recognizes sales based upon shipment of products to its customers and has
procedures in place at each of its subsidiaries to ensure that an accurate
cut-off is obtained for each reporting period.
Allowances for cash
discounts, volume rebates, and other customer incentive programs, as well as
gross customer returns, among others, are recorded as a reduction of sales at
the time of sale based upon the estimated future outcome. Cash
discounts, volume rebates and other customer incentive programs are based upon
certain percentages agreed to with the Company’s various customers, which are
typically earned by the customer over an annual period. The Company
records periodic estimates for these amounts based upon the historical results
to date, estimated future results through the end of the contract period and the
contractual provisions of the customer agreements. For calendar year
customer agreements, the Company is able to adjust its periodic estimates to
actual amounts as of December 31 each year based upon the contractual provisions
of the customer agreements. For those customers who have agreements
that are not on a calendar year cycle, the Company records estimates at December
31 consistent with the above described methodology. As a result, at
the end of any given reporting period, the amounts recorded for these allowances
are based upon estimates of the likely outcome of future sales with the
applicable customers and may require adjustment in the future if the actual
outcome differs. The Company believes that its procedures for
estimating such amounts are reasonable.
Customer returns
are recorded on an actual basis throughout the year and also include an estimate
at the end of each reporting period for future customer returns related to sales
recorded prior to the end of the period. The Company generally
estimates customer returns based upon the time lag that historically occurs
between the date of the sale and the date of the return while also factoring in
any new business conditions that might impact the historical analysis such as
new product introduction. The Company believes that its procedures
for estimating such amounts are reasonable.
Provisions for the
estimated costs for future product warranty claims are recorded in cost of sales
at the time a sale is recorded. The amounts recorded are generally
based upon historically derived percentages while also factoring in any new
business conditions that might impact the historical analysis such as new
product introduction. The Company also periodically evaluates the
adequacy of its reserves for warranty recorded in its consolidated balance sheet
as a further test to ensure the adequacy of the recorded
provisions. Warranty claims can extend far into the
future. As a result, significant judgment is required by the Company
in determining the appropriate amounts to record and such judgments may prove to
be incorrect in the future. The Company believes that its procedures
for estimating such amounts are reasonable.
Provisions for the
estimated allowance for doubtful accounts are recorded in selling, general and
administrative expense, net at the time a sale is recorded. The
amounts recorded are generally based upon historically derived percentages while
also factoring in any new business conditions that might impact the historical
analysis such as changes in
economic conditions, past due and nonperforming accounts, bankruptcies
or other events affecting
particular customers. The Company also periodically evaluates
the adequacy of its allowance for doubtful accounts recorded in its consolidated
balance sheet as a further test to ensure the adequacy of the recorded
provisions. The analysis for allowance for doubtful accounts often
involves subjective analysis of a particular customer’s ability to
pay. As a result, significant judgment is required by the Company in
determining the appropriate amounts to record and such judgments may prove to be
incorrect in the future. The Company believes that its procedures for
estimating such amounts are reasonable.
Inventory
Valuation
The Company values
inventories at the lower of the cost or market with approximately 34% of the
Company’s inventory as of December 31, 2008 valued using the last-in, first-out
(“LIFO”) method and the remainder valued using the first-in, first-out (“FIFO”)
method. In connection with both LIFO and FIFO inventories, the
Company will record provisions, as appropriate, to write-down obsolete and
excess inventory to estimated net realizable value. The process for
evaluating obsolete and excess inventory often requires the Company to make
subjective judgments and estimates concerning future sales levels, quantities
and prices at which such inventory will be able to be sold in the normal course
of business. Accelerating the disposal process or incorrect estimates
of future sales potential may cause the actual results to differ from the
estimates at the time such inventory is disposed or sold. The Company
believes that its procedures for estimating such amounts are
reasonable.
Income
Taxes
In June 2006, the
Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109)”, (“FIN 48”). FIN 48 clarifies the criteria that an
individual tax position must satisfy for some or all of the benefits of that
position to be recognized in a company’s financial statements. FIN 48
prescribes a recognition threshold of “more-likely-than-not” and a measurement
attribute for all tax positions taken or expected to be taken on a tax return in
order for those tax positions to be recognized in the financial
statements. The Company adopted the provisions of FIN 48 effective
January 1, 2007.
As of January 1,
2008, the Company had unrecognized tax benefits of approximately $36.3 million
related to various federal, foreign and state tax income tax
matters. The amount of unrecognized tax benefits at December 31, 2008
was approximately $31.3 million. The amount of unrecognized tax
benefits that impact the effective tax rate, if recognized, is approximately
$15.4 million. The difference between the total amount of
unrecognized tax benefits and the amount that would impact the effective rate
consists of items that if recognized would result in a corresponding increase in
the valuation allowance.
The Company
accounts for income taxes using the liability method in accordance with SFAS No.
109 “Accounting for Income Taxes” (“SFAS No. 109”), which requires that the
deferred tax consequences of temporary differences between the amounts recorded
in the Company’s Consolidated Financial Statements and the amounts included in
the Company’s federal, state and foreign income tax returns to be recognized in
the balance sheet. As the Company generally does not file their
income tax returns until well after the closing process for the December 31
financial statements is complete, the amounts recorded at December 31 reflect
estimates of what the final amounts will be when the actual tax returns are
filed for that fiscal year. In addition, estimates are often required
with respect to, among other things, the appropriate state income tax rates to
use in the various states that NTK Holdings and its subsidiaries are required to
file, the potential utilization of operating and capital loss carry-forwards and
valuation allowances required, if any, for tax assets that may not be realizable
in the future. The Company requires each of its subsidiaries to
submit year-end tax information packages as part of the year-end financial
statement closing process so that the information used to estimate the deferred
tax accounts at December 31 is reasonably consistent with the amounts expected
to be included in the filed tax returns. SFAS No. 109 requires
balance sheet classification of current and long-term deferred income tax assets
and liabilities based upon the classification of the underlying asset or
liability that gives rise to a temporary difference. As such, the
Company has historically had prepaid income tax assets due principally to the
unfavorable tax consequences of recording expenses for required book reserves
for such things as, among others, bad debts, inventory valuation, insurance,
product liability and warranty that cannot be deducted for income tax purposes
until such expenses are actually paid. The Company believes the
procedures and estimates used in its accounting for income taxes are reasonable
and in accordance with established tax law. The income tax estimates
used have historically not resulted in material adjustments to income tax
expense in subsequent periods when the estimates are adjusted to the actual
filed tax return amounts, although there may be reclassifications between the
current and long-term portion of the deferred tax accounts.
During the second
quarter of 2008, the Company evaluated the realizability of its domestic
deferred tax assets as a result of recent economic conditions, the Company’s
recent operating results and the Company’s revised forecast, including the
increase in future interest expense as a result of the May 2008 debt
refinancing. As a result of this analysis, the Company established a
valuation allowance of approximately $14.6 million against domestic deferred tax
assets in existence as of December 31, 2007. In addition, for the
year ended December 31, 2008, the Company recorded a valuation allowance against
certain tax assets related to domestic and foreign operating losses generated in
the period of approximately $62.8 million. In assessing the need for
a valuation allowance, the Company has assessed the available means of
recovering its deferred tax assets, including the ability to carry back net
operating losses, available deferred tax liabilities, tax planning strategies
and projections of future taxable income. The Company has concluded
that it is more likely than not, based upon all available evidence, that a
valuation allowance is required for substantially all of its net domestic
deferred tax assets. The Company has provided valuation allowances
for foreign net operating losses of approximately $16.9 million.
Goodwill
and Other Long-Lived Assets
The Company accounts for acquired
goodwill and intangible assets in accordance with Statement of Financial
Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”) and SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which involves
judgment with respect to the determination of the purchase price and the
valuation of the acquired assets and liabilities in order to determine the final
amount of goodwill. The Company believes that the estimates that
it has used to record its acquisitions are reasonable and in accordance with
SFAS No. 141.
The Company
accounts for acquired goodwill and goodwill impairment in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) (see Note 1 of
the Notes to the Consolidated Financial Statements included elsewhere herein)
which requires considerable judgment in the valuation of acquired goodwill and
the ongoing evaluation of goodwill impairment. Under SFAS No. 142,
goodwill and intangible assets determined to have indefinite useful lives are
not amortized. Instead, these assets are evaluated for impairment on
an annual basis, or more frequently when an event occurs or circumstances change
between annual tests that would more likely than not reduce the fair value of
the reporting unit below its carrying value, including, among others, a
significant adverse change in the business climate. The Company has
set the annual evaluation date as of the first day of its fiscal fourth
quarter. The reporting units evaluated for goodwill impairment by the
Company have been determined to be the same as the Company’s operating segments
in accordance with the criteria in SFAS No. 142 for determining reporting units
and include Residential Ventilation Products (“RVP”), Home Technology Products
(“HTP”) and the residential and commercial segments of Air Conditioning and
Heating Products (“Residential HVAC” and “Commercial HVAC”).