Form 10-Q for Nortek, Inc. for 1st Quarter 2007

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

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

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

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

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

	March 31,		December 31,
	2007		2006
Assets
Current Assets:
Unrestricted cash and cash equivalents	$	43.2	$	57.4
Restricted cash		1.2		1.2
Accounts receivable, less allowances of $11.5 and $9.4		338.1		328.9
Inventories:
Raw materials		87.9		83.1
Work in process		34.5		28.7
Finished goods		188.4		166.8
		310.8		278.6

Prepaid expenses		14.4		13.7
Other current assets		24.3		24.4
Prepaid income taxes		23.7		21.2
Total current assets		755.7		725.4

Property and Equipment, at Cost:
Land		9.6		9.5
Buildings and improvements		102.7		101.9
Machinery and equipment		183.0		177.2
		295.3		288.6
Less accumulated depreciation		73.2		66.1
Total property and equipment, net		222.1		222.5

Other Assets:
Goodwill		1,493.5		1,481.4
Intangible assets, less accumulated amortization of $58.5 and $52.4		144.9		150.4
Deferred debt expense		31.7		33.1
Restricted investments and marketable securities		2.0		3.3
Other assets		11.3		11.2
		1,683.4		1,679.4
Total Assets	$	2,661.2	$	2,627.3

Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	50.7	$	23.3
Current maturities of long-term debt		17.8		20.0
Accounts payable		223.6		188.2
Accrued expenses and taxes, net		236.6		282.8
Total current liabilities		528.7		514.3

Other Liabilities:
Deferred income taxes		30.7		33.9
Long-term payable to affiliate		30.1		24.9
Other		139.5		128.8
		200.3		187.6

Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		1,361.6		1,362.3

Stockholder’s Investment:
Common stock, $0.01 par value, authorized 3,000 shares; 3,000 issued
and outstanding at March 31, 2007 and December 31, 2006		---		---
Additional paid-in capital		412.2		412.1
Retained earnings		145.4		139.4
Accumulated other comprehensive income		13.0		11.6
Total stockholder's investment		570.6		563.1
Total Liabilities and Stockholder's Investment	$	2,661.2	$	2,627.3

	For the first quarter ended
	March 31, 2007			April 1, 2006
	(Dollar amounts in millions)

Net Sales	$	552.5		$	534.5

Costs and Expenses:
Cost of products sold		384.6			370.5
Selling, general and administrative expense, net		117.0			95.1
Amortization of intangible assets		6.0			4.2
		507.6			469.8
Operating earnings		44.9			64.7
Interest expense		(29.2	)		(28.0	)
Investment income		0.4			0.7
Earnings before provision for income taxes		16.1			37.4
Provision for income taxes		6.9			14.2
Net earnings	$	9.2		$	23.2

	For the first quarter ended
	March 31, 2007			April 1, 2006
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net earnings	$	9.2		$	23.2

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization expense		14.6			12.2
Non-cash interest expense, net		1.4			1.3
Non-cash stock-based compensation expense		0.1			0.1
Loss (gain) on property and equipment		---			0.1
Deferred federal income tax provision		1.3			3.5
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		(7.0	)		(23.4	)
Inventories		(30.1	)		(10.2	)
Prepaids and other current assets		(1.1	)		0.8
Accounts payable		34.1			16.9
Accrued expenses and taxes		(36.5	)		(13.9	)
Long-term assets, liabilities and other, net		0.7			(0.6	)
Total adjustments to net earnings		(22.5	)		(13.2	)
Net cash (used in) provided by operating activities		(13.3	)		10.0
Cash Flows from investing activities:
Capital expenditures		(6.8	)		(12.1	)
Net cash paid for businesses acquired		(16.8	)		(7.9	)
Proceeds from the sale of property and equipment		---			0.1
Change in restricted cash and marketable securities		1.3			---
Other, net		(0.3	)		(1.4	)
Net cash used in investing activities		(22.6	)		(21.3	)
Cash Flows from financing activities:
Increase in borrowings		28.5			9.4
Payment of borrowings		(6.8	)		(5.0	)
Other, net		---			(0.1	)
Net cash provided by financing activities		21.7			4.3
Net change in unrestricted cash and cash equivalents		(14.2	)		(7.0	)
Unrestricted cash and cash equivalents at the beginning of the period		57.4			77.2
Unrestricted cash and cash equivalents at the end of the period	$	43.2		$	70.2

Supplemental disclosure of cash flow information:

Interest paid	$	45.1		$	39.8

Income taxes paid, net	$	2.8		$	2.4

					Accumulated
	Additional				Other
	Paid-in		Retained		Comprehensive		Comprehensive
	Capital		Earnings		Income		Income

Balance, December 31, 2005	$	415.0	$	77.8	$	7.5	$	---
Net earnings		---		23.2		---		23.2
Other comprehensive income:
Currency translation adjustment		---		---		0.6		0.6
Comprehensive income							$	23.8
Capital contribution from parent		0.2		---		---
Stock-based compensation		0.1		---		---
Balance, April 1, 2006	$	415.3	$	101.0	$	8.1

						Accumulated
	Additional					Other
	Paid-in		Retained			Comprehensive		Comprehensive
	Capital		Earnings			Income		Income

Balance, December 31, 2006	$	412.1	$	139.4		$	11.6	$	---
Net earnings		---		9.2			---		9.2
Other comprehensive income:
Currency translation adjustment		---		---			1.4		1.4
Comprehensive income								$	10.6
Adoption of FIN 48 (see Note F)		---		(3.2	)		---
Stock-based compensation		0.1		---			---
Balance, March 31, 2007	$	412.2	$	145.4		$	13.0

(A) The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of Nortek, Inc. (the “Company” or “Nortek”) and all of its wholly-owned subsidiaries. The Unaudited Financial Statements include the accounts of Nortek, as appropriate, and all of its wholly-owned subsidiaries, after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current year presentation. It is suggested that these Unaudited Financial Statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s latest annual report on Form 10-K, its most recent filing on Form S-1 and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission (“SEC”).

On May 5, 2006, NTK Holdings, Inc. (“NTK Holdings”) filed a registration statement on Form S-1 (most recently amended on September 15, 2006) with the SEC for an initial public offering of shares of its common stock (the “Offering”). Although NTK Holdings has not withdrawn its registration statement on Form S-1, there can be no assurance that NTK Holdings will complete the Offering in the foreseeable future.

The Company follows the modified-prospective transition method of accounting for stock-based compensation in accordance with SFAS No. 123R. Under the modified-prospective transition method, the Company is required to recognize compensation cost for share-based payments to employees based on their grant-date fair value. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123R was adopted, are based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123.

At March 31, 2007, certain employees and consultants held approximately 23,079 C-1 units and approximately 45,751 C-2 units, which represent equity interests in THL-Nortek Investors, LLC (“Investors LLC”) that function similar to stock awards. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 18,626 and 16,720 were vested at March 31, 2007 and December 31, 2006, respectively. The total fair value of the C-1 units is approximately $1.1 million and approximately $0.3 million remains to be amortized at March 31, 2007. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. At March 31, 2007 and December 31, 2006, there was approximately $1.6 million of unamortized stock-based employee compensation with respect to the C-2 units, which will be recognized in the event that it becomes probable that the C-2 units or any portion thereof will vest. The C-1 and C-2 units were valued using the Black-Scholes option pricing model to determine the freely-traded call option value based upon information from comparable public companies, which was then adjusted to reflect the discount period, the minority interest factor and the lack of marketability factor to arrive at the final valuations.

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 FIN 48 on January 1, 2007 (see Note F).

The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions (see Note C). Approximately $8.4 million and $62.3 million of goodwill associated with certain companies acquired during the first quarter ended March 31, 2007 and the year ended December 31, 2006, respectively, will be deductible for income tax purposes. Purchase accounting adjustments relate principally to final revisions resulting from the completion of fair value adjustments and adjustments to deferred income taxes that impact goodwill.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008, including interim periods within the year ending December 31, 2008. Earlier adoption is encouraged. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 for the Company. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated financial statements.

(B) At March 31, 2007, Nortek had approximately $34.0 million outstanding and approximately $133.2 million of additional borrowing capacity under the U.S. revolving portion of its senior secured credit facility, with approximately $22.8 million in outstanding letters of credit. Borrowings under the revolving portion of the senior secured credit facility are used for general working capital purposes. Under the Canadian revolving portion of its senior secured credit facility the Company had no outstanding borrowings and approximately $10.0 million of additional borrowing capacity. The letters of credit have been issued under Nortek’s revolving credit facility as additional security for (1) approximately $17.2 million relating to certain of the Company’s insurance programs, (2) approximately $3.9 million relating to leases outstanding for certain of the Company’s manufacturing facilities and (3) approximately $1.7 million relating to certain of the subsidiaries’ purchases and other requirements. Letters of credit reduce borrowing availability under Nortek’s revolving credit facility on a dollar for dollar basis. Subsequent to March 31, 2007, Nortek borrowed an additional $60.0 million under the U.S. revolving portion of its senior secured credit facility.

(C)

On March 2, 2007, the Company, through its wholly-owned subsidiary, Linear LLC (“Linear”), acquired the stock of LiteTouch, Inc. for approximately $10.6 million (utilizing approximately $8.1 million of cash and issuing unsecured 6% subordinated notes totaling $2.5 million due March 2009) plus contingent consideration, which may be payable in future years. LiteTouch is located in Salt Lake City, UT and designs, manufactures and sells automated lighting controls for a variety of uses including residential, commercial, new construction and retro-fit applications.

On December 12, 2006, the Company, through Linear, acquired the stock of Gefen, Inc. (“Gefen”) for approximately $24.0 million (utilizing approximately $21.5 million of cash and issuing unsecured 6% subordinated notes totaling $2.5 million due December 2008) plus contingent consideration, which may be payable in future years. Gefen is located in Woodland Hills, CA and designs and sells 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.

On November 11, 2006, the Company, through its wholly-owned subsidiary, Broan-NuTone LLC (“Broan”), acquired the stock of Zephyr Corporation (“Zephyr”) and Pacific Zephyr Range Hood, Inc. (“Pacific”) for approximately $26.4 million (utilizing approximately $22.4 million of cash and issuing unsecured 6% subordinated notes totaling $4.0 million due November 2009). Zephyr and Pacific are both located in San Francisco, CA. Zephyr designs and sells upscale range hoods, while Pacific designs, sells and installs range hoods and other kitchen products for Asian cooking markets in the United States.

On July 18, 2006, the Company, through Linear, acquired the stock of Magenta Research, Ltd. (“Magenta”) for approximately $14.4 million (utilizing approximately $11.9 million of cash, of which approximately $10.0 million was borrowed under Nortek’s revolving credit facility and is still outstanding at March 31, 2007, and issuing unsecured 6% subordinated notes totaling $2.5 million due July 2008) plus contingent consideration, which may be payable in future years. Magenta is located in New Milford, CT and designs and sells products that distribute audio and video signals over Category 5 and fiber optic cable to multiple display screens.

On June 26, 2006, the Company, through Linear, acquired the stock of Secure Wireless, Inc. (“Secure Wireless”) and Advanced Bridging Technologies, Inc. (“ABT”) through two mergers for an initial purchase price of approximately $10.5 million, plus contingent consideration of approximately $18.1 million that was earned by Secure Wireless in 2006 and was paid in April 2007. Additional contingent consideration may be payable in future years. Secure Wireless designs and sells wireless security products for the residential and commercial markets while ABT designs and sells innovative radio frequency control products and accessories. Both Secure Wireless and ABT are located in Carlsbad, CA.

On April 14, 2006, the Company, through two newly formed subsidiaries of its HVAC segment, acquired the assets and certain liabilities of Huntair, Inc. (“Huntair”) and Cleanpak International, LLC (“Cleanpak”), for an initial purchase price of approximately $48.4 million (utilizing approximately $38.4 million of cash and issuing unsecured 6% subordinated notes totaling $10.0 million due April 2008) plus contingent consideration of approximately $30.0 million which was earned in 2006 and was paid in April 2007. Both Huntair and Cleanpak are located near Portland, OR and manufacture, market and distribute custom air handlers and related products for commercial and cleanroom applications.

On January 25, 2006, the Company, through its wholly-owned subsidiary, Mammoth China Ltd. (“Mammoth China”), increased its ownership interests in Mammoth (Zhejiang) EG Air Conditioning Ltd. (“MEG”) and Shanghai Mammoth Air Conditioning Co., Ltd. (“MSH”) to sixty-percent for approximately $2.4 million. The majority ownership transaction relating to MSH was finalized with the Chinese authorities in May 2006. Prior to January 25, 2006, Mammoth China had a forty-percent minority interest in MEG and a fifty-percent interest in MSH.

Acquisitions contributed approximately $53.7 million, $10.2 million and $2.7 million to net sales, operating earnings and depreciation and amortization expense, respectively, for the the first quarter ended March 31, 2007. With the exception of Zephyr and Pacific, which are included in the Residential Ventilation Products segment, and Huntair, Cleanpak, MEG and MSH, which are included in the Air Conditioning and Heating Products segment, all acquisitions are included in the Home Technology Products segment in the Company’s segment reporting (see Note E).

As described above, $48.1 million of contingent consideration was paid in April 2007 related to the Secure Wireless and the Huntair and Cleanpak acquisitions. Contingent consideration of approximately $7.5 million related to the acquisition of OmniMount, which was accrued for at December 31, 2006, was also paid in the first quarter of 2007. The estimated total maximum potential amount of contingent consideration that may be paid in the future for all completed acquisitions is approximately $81.2 million.

Acquisitions are accounted for as purchases and accordingly have been included in the Company’s consolidated results of operations since the acquisition date. For recent acquisitions, the Company has made preliminary estimates of the fair value of the assets and liabilities of the acquired companies, including intangible assets and property and equipment, as of the date of acquisition, utilizing information available at the time that the Company’s Unaudited Financial Statements were prepared and these estimates are subject to refinement until all pertinent information has been obtained. The Company is in the process of obtaining appraisals of intangible assets and property and equipment and finalizing the integration plans for certain of the acquired companies, which are expected to be completed by the first half of 2007.

On April 10, 2007, the Company, through Linear, acquired the assets and certain liabilities of c.p. All Star Corporation (“All Star”) for an initial purchase price of approximately $3.0 million (utilizing approximately $2.5 million of cash and issuing unsecured 6% subordinated notes totaling $0.5 million due April 2009). All Star is located in Downington, PA and is a leading manufacturer and distributor of residential, commercial and industrial gate operators, garage door openers, radio controls and accessory products for the garage door and fence industry.

Pro forma results related to these acquisitions have not been presented, as the effect is not significant to the Company’s consolidated operating results.

(D) Operating results for the first quarter ended March 31, 2007 and April 1, 2006 include a non-cash foreign exchange gain of approximately $0.2 million (of which approximately $0.1 million is included in the RVP segment) and $0.1 million, respectively, related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

The Company has a management agreement with an affiliate of Thomas H. Lee Partners, L.P. providing for certain financial and strategic advisory and consultancy services. Nortek expensed approximately $0.4 million and $0.6 million for the first quarter ended March 31, 2007 and April 1, 2006, respectively, related to this management agreement in the accompanying Unaudited Condensed Consolidated Statement of Operations.

(E) The Company is a leading diversified manufacturer of innovative, branded residential and commercial products, which is organized within three reporting segments: the Residential Ventilation Products (“RVP”) segment, the Home Technology Products (“HTP”) segment and the Air Conditioning and Heating Products (“HVAC”) segment. The HVAC segment combines the results of the Company’s residential and commercial heating, ventilating and air conditioning businesses. In the tables below, Unallocated includes corporate related items, intersegment eliminations and certain income and expense items not allocated to reportable segments.

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

	For the first quarter ended
	March 31, 2007			April 1, 2006
	(Dollar amounts in millions)

Net sales:
Residential ventilation products	$	208.7		$	211.6
Home technology products		123.2			107.5
Air conditioning and heating products		220.6			215.4
Consolidated net sales	$	552.5		$	534.5

Operating earnings:
Residential ventilation products (1)	$	25.2		$	36.1
Home technology products		16.5			17.3
Air conditioning and heating products (2)		9.8			17.9
Subtotal		51.5			71.3
Unallocated:
Stock-based compensation charges		(0.1	)		(0.1	)
Foreign exchange gain on intercompany debt		0.1			0.1
Unallocated, net		(6.6	)		(6.6	)
Consolidated operating earnings		44.9			64.7
Interest expense		(29.2	)		(28.0	)
Investment income		0.4			0.7
Earnings before provision for income taxes	$	16.1		$	37.4

(1)

The operating results of the RVP segment for the first quarter ended March 31, 2007 include an approximate $0.6 million charge related to the closure of the Company’s NuTone, Inc. Cincinnati, OH facility (see Note H) and a non-cash foreign exchange gain of approximately $0.1 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries. The operating results of the RVP segment for the first quarter ended April 1, 2006 include an increase in warranty expense of approximately $1.5 million related to a product safety upgrade.

	For the first quarter ended
	March 31, 2007		April 1, 2006
	(Dollar amounts in millions)

Depreciation Expense:
Residential ventilation products	$	3.0	$	3.2
Home technology products		1.3		0.9
Air conditioning and heating products		4.1		3.7
Other		0.2		0.1
Consolidated depreciation expense	$	8.6	$	7.9

Amortization expense:
Residential ventilation products	$	1.3	$	1.5
Home technology products (1)		2.7		2.1
Air conditioning and heating products		1.9		0.6
Other		0.1		0.1
Consolidated amortization expense	$	6.0	$	4.3

Capital Expenditures:
Residential ventilation products	$	2.4	$	4.6
Home technology products		1.2		1.9
Air conditioning and heating products		3.2		5.5
Other		---		0.1
Consolidated capital expenditures	$	6.8	$	12.1

	For the first quarter ended
	March 31, 2007			April 1, 2006
Income tax provision at the federal statutory rate		35.0	%		35.0	%
Net change from federal statutory rate:
Interest related to uncertain tax positions, net of federal income tax effect		3.1			---
State income tax provision, net of federal income tax effect		2.5			1.7
Tax effect resulting from foreign activities		1.5			0.8
Non-deductible expenses		0.6			0.6
Other, net		0.2			(0.1	)
Income tax provision at estimated effective rate		42.9	%		38.0	%

As of January 1, 2007, after the adoption of FIN 48, the Company has provided a liability of approximately $33.0 million for unrecognized tax benefits related to various federal, foreign and state income tax matters. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, is approximately $7.1 million. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets of approximately $2.1 million, goodwill adjustments of approximately $17.2 million, and the federal tax benefit of state income tax items of approximately $6.6 million. The reserve for income taxes has increased by approximately $0.5 million in the first quarter ended March 31, 2007.

During the first quarter ended March 31, 2007, the Company made payments of approximately $0.7 million related to amounts covered by the liability for uncertain tax positions. The Company expects that approximately $5.2 million of the total amount of unrecognized tax benefits will be recognized during 2007 as a reduction of goodwill as a result of the expiration of the statutes of limitation for various items.

The Company has been notified that its federal tax returns for the periods from January 1, 2004 to August 27, 2004 and from August 28, 2004 to December 31, 2004 and the year ended December 31, 2005 will be audited by the Internal Revenue Service. The Company and its subsidiaries’ foreign and state income tax returns are generally subject to audit for the periods from January 10, 2003 to December 31, 2003, from January 1, 2004 to August 27, 2004 and from August 28, 2004 to December 31, 2004 and for the years ended December 31, 2002, 2005 and 2006.

(G) At March 31, 2007, the Company’s former subsidiary, Ply Gem, has guaranteed approximately $21.0 million of third party obligations relating to rental payments through June 30, 2016 under a facility leased by a former subsidiary, which was sold on September 21, 2001. The Company has indemnified these guarantees in connection with the sale of Ply Gem on February 12, 2004 and has recorded an estimated liability related to this indemnified guarantee of approximately $0.9 million at March 31, 2007 in accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). The buyer of the former subsidiary has provided certain indemnifications and other rights to Nortek for any payments that it might be required to make pursuant to this guarantee. Should the buyer of the former subsidiary cease making payments then the Company may be required to make payments on its indemnification.

The Company has indemnified third parties for certain matters in a number of transactions involving dispositions of former subsidiaries. The Company has recorded liabilities in relation to these indemnifications, including the indemnified guarantee noted above, of approximately $11.8 million and $12.0 million at March 31, 2007 and December 31, 2006, respectively. Approximately $5.2 million of short-term liabilities and approximately $6.6 million of long-term liabilities are recorded in accrued expenses and other long-term liabilities, respectively, in the accompanying unaudited condensed consolidated balance sheet at March 31, 2007 related to these indemnifications.

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

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

Certain sole source suppliers of various fabricated material components and sub-assemblies (“material components”) to the Company’s kitchen range hood subsidiaries based in Italy and Poland experienced financial difficulties in January 2007. The Company is working and will continue to work closely with these suppliers to help them in meeting the supply needs of these subsidiaries for the foreseeable future. The Company has not experienced any significant difficulties in its production or shipments to its customers as a result of these suppliers’ difficulties in maintaining its production as of May 11, 2007. However, there can be no assurance that the Company will be able to continue to prevent a disruption in the supply of such material components or be able to find alternative suppliers. Should these suppliers be unable to continue in operation and the Company is unable to find alternative suppliers for a lengthy period of time, the Company could experience a material adverse effect on its operations. The Company recorded approximately $16.0 million of estimated losses in the RVP segment in the fourth quarter of 2006 in selling, general and administrative expense, net resulting from the unlikelihood that these suppliers will be able to repay advances from our subsidiaries based in Italy and Poland and amounts due under other arrangements. While the Company has recorded its best estimate of the losses related to these suppliers, the actual losses may be different than the amounts recorded at December 31, 2006. There were no additional material losses recorded in the first quarter ended March 31, 2007 related to these suppliers.

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

Within the RVP segment, the Company, in the first quarter of 2007, recorded liabilities of approximately $0.6 million in the accompanying unaudited condensed consolidated balance sheet related to the closure of its NuTone Cincinnati, OH facility and the relocation of such operations to certain other subsidiaries of the Company within this segment. It is estimated that in total approximately $2.1 million, including the $0.6 million noted above, will be expensed in selling, general and administrative expense, net in conjunction with the closure of this facility and approximately 74 employees will be terminated. It is currently anticipated that the closure of the NuTone facility and related payments will occur in or around July 2007. Prior to August 2006, this facility supported manufacturing, warehousing and distribution activities for NuTone. The facility to be closed is owned by the Company and is currently under agreement to be sold.

The following table sets forth restructuring activity in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”) in the accompanying unaudited condensed consolidated balance sheet at March 31, 2007 and the accompanying unaudited condensed statement of operations for the first quarter ended March 31, 2007. These costs are included in cost of goods sold and selling, general and administrative expense, net in the accompanying unaudited condensed consolidated statement of operations of the Company.

On or about April 30, 2007 after meeting and negotiating with the bargaining committee of the Teamsters Local 970 representing approximately 127 union employees of the Company’s wholly-owned subsidiary Mammoth, Inc.'s (“Mammoth”) manufacturing plant located in Chaska, Minnesota, it was decided to shut down manufacturing operations at the Chaska plant and relocate such operations to other manufacturing facilities within the Commercial HVAC Group. Mammoth is negotiating with the union over the severance benefits associated with the shutdown. It is anticipated that the manufacturing operations at Chaska will cease by the end of July 2007. The costs of the shutdown, including severance, relocation expenses, facility lease costs and asset write-offs are estimated to be between $3.0 million and $3.7 million.

Pension and profit sharing expense charged to operations aggregated approximately $2.4 million and $2.3 million for the first quarter ended March 31, 2007 and April 1, 2006, respectively. The Company’s policy is to generally fund currently at least the minimum required annual contribution of its various qualified defined benefit plans. At December 31, 2006, as previously disclosed in the Company’s latest annual report on Form 10-K as filed with the SEC, it was estimated that approximately $9.6 million would be contributed to the Company’s defined benefit pension plans in 2007. However, at March 31, 2007, the Company revised its estimated contributions to its defined benefit pension plans to approximately $9.8 million, of which approximately $2.0 million has been made. It is estimated that approximately $2.3 million will be paid in the second quarter of 2007, approximately $3.2 million will be paid in the third quarter of 2007 and approximately $2.3 million will be paid in the fourth quarter of 2007.

(J) The Company’s 8 1/2% Notes are guaranteed by all of the Company’s current and certain future domestic subsidiaries (the “Guarantors”), as defined, with the exception of certain domestic subsidiaries, as defined, which are excluded from the 8 1/2% Note guarantee. The Guarantors are wholly-owned either directly or indirectly by the Company and jointly and severally guarantee the Company’s obligations under the 8 1/2% Notes. None of the Company’s subsidiaries organized outside of the United States guarantee the 8 1/2% Notes.

			Guarantor			Non-Guarantor					Nortek
	Parent		Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Dollar amounts in millions)
ASSETS:
Current Assets:
Unrestricted cash and cash equivalents	$	5.3	$	6.4		$	31.5		$	---	$	43.2
Restricted cash		---		1.2			---			---		1.2
Accounts receivable, less allowances		---		241.4			96.7			---		338.1
Intercompany receivables (payables)		1.2		(0.8	)		(0.4	)		---		---
Inventories		---		250.7			60.1			---		310.8
Prepaid expenses		1.6		7.8			5.0			---		14.4
Other current assets		9.8		3.2			11.3			---		24.3
Prepaid income taxes		2.6		20.1			1.0			---		23.7
Total current assets		20.5		530.0			205.2			---		755.7
Property and Equipment, at Cost:
Total property and equipment, net		1.3		143.4			77.4			---		222.1
Other Long-term Assets:
Investment in subsidiaries and long-term receivable from (to) subsidiaries/parent		1,967.9		(118.5

	(Amounts in millions)

Balance at December 31, 2006		$	1,481.4
Acquisitions during the first quarter ended March 31, 2007			8.4
Adoption of FIN 48 (see Note F)			3.8
Purchase accounting adjustments			(0.2	)
Impact of foreign currency translation			0.1
Balance at March 31, 2007		$	1,493.5

	For the first quarter ended
	March 31, 2007			April 1, 2006
	(Amounts in millions)

Balance, beginning of period	$	41.2		$	34.8
Warranties provided during period		5.5			7.3
Settlements made during period		(5.6	)		(4.2	)
Changes in liability estimate, including expirations and acquisitions		0.4			0.3
Balance, end of period	$	41.5		$	38.2

	Employee Separation Expenses		Other			Total Restructuring Costs
	(Dollar amounts in millions)

Balance at December 31, 2006	$	---	$	0.1		$	0.1
Provision		0.6		0.1			0.7
Payments and asset write downs		---		(0.1	)		(0.1	)
Balance at March 31, 2007	$	0.6	$	0.1		$	0.7