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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

[ ] 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: 333-133866

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

Delaware	20-1934298
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

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

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

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

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

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

Large accelerated filer [_]

Accelerated Filer [_]

Non-accelerated filer [X]

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

The aggregate market value of voting stock held by non-affiliates is zero.

The number of shares of Common Stock outstanding as of May 11, 2007 was 3,000.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NTK HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollar amounts in millions, except share data)

	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		40.0		41.7
Restricted investments and marketable securities		2.0		3.3
Other assets		11.3		11.2
		1,691.7		1,688.0
Total Assets	$	2,669.5	$	2,635.9

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		237.5		283.7
Total current liabilities		529.6		515.2

Other Liabilities:
Deferred income taxes		32.8		35.9
Other		139.5		128.8
		172.3		164.7

Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		1,895.3		1,883.2

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		21.4		21.3
Retained earnings		37.9		39.9
Accumulated other comprehensive income		13.0		11.6
Total stockholder's investment		72.3		72.8
Total Liabilities and Stockholder's Investment	$	2,669.5	$	2,635.9

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

NTK HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	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		117.1			95.3
Amortization of intangible assets		6.0			4.2
		507.7			470.0
Operating earnings		44.8			64.5
Interest expense		(42.3	)		(36.1	)
Investment income		0.4			0.7
Earnings before provision for income taxes		2.9			29.1
Provision for income taxes		1.7			11.3
Net earnings	$	1.2		$	17.8

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

NTK HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	For the first quarter ended
	March 31, 2007			April 1, 2006
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net earnings	$	1.2		$	17.8

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		14.5			8.7
Non-cash stock-based compensation expense		0.1			0.1
Loss 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		(41.7	)		(16.6	)
Long-term deferred compensation		---			0.8
Long-term assets, liabilities and other, net		0.8			(0.7	)
Total adjustments to net earnings		(14.5	)		(7.8	)
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

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

NTK HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE FIRST QUARTER ENDED APRIL 1, 2006

(Dollar amounts in millions)

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

Balance, December 31, 2005	$	130.2	$	52.8	$	7.5	$	---
Net earnings		---		17.8		---		17.8
Other comprehensive income:
Currency translation adjustment		---		---		0.6		0.6
Comprehensive income							$	18.4
Stock-based compensation		0.1		---		---
Balance, April 1, 2006	$	130.3	$	70.6	$	8.1

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

NTK HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT

FOR THE FIRST QUARTER ENDED MARCH 31, 2007

(Dollar amounts in millions)

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

Balance, December 31, 2006	$	21.3	$	39.9		$	11.6	$	---
Net earnings		---		1.2			---		1.2
Other comprehensive income:
Currency translation adjustment		---		---			1.4		1.4
Comprehensive income								$	2.6
Adoption of FIN 48 (see Note F)		---		(3.2	)		---
Stock-based compensation		0.1		---			---
Balance, March 31, 2007	$	21.4	$	37.9		$	13.0

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

NTK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 AND APRIL 1, 2006

(A) The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of NTK Holdings, Inc. (the “Company” or “NTK Holdings”) and all of its wholly-owned subsidiaries. The Unaudited Financial Statements include the accounts of NTK Holdings, 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, the Company 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 the Company has not withdrawn its registration statement on Form S-1, there can be no assurance that the Company will complete the Offering in the foreseeable future.

Stock-Based Compensation of Employees, Officers and Directors

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.

The Company recorded stock-based compensation charges in selling, general and administrative expense, net of approximately $0.1 million for each of the first quarters ended March 31, 2007 and April 1, 2006, respectively, in accordance with SFAS No. 123R.

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

Goodwill

The following table presents a summary of the activity in goodwill for the first quarter ended March 31, 2007:

	(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

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.

New Accounting Pronouncements

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)

On May 10, 2006, NTK Holdings borrowed an aggregate principal amount of $205.0 million under a senior unsecured loan facility. The proceeds of this borrowing were utilized to (1) pay a cash dividend of approximately $174.9 million to Investors LLC which, in turn, made a distribution to the holders of its Class A and Class B membership interests, including affiliates of Thomas H. Lee Partners, L.P. and certain members of the Company’s management, (2) contribute capital of approximately $25.9 million to Nortek Holdings, which was used by Nortek Holdings, together with a dividend of approximately $28.1 million from Nortek to make a distribution of approximately $54.0 million to participants under the 2004 Nortek Holdings, Inc. Deferred Compensation Plan (including certain of the Company’s executive officers) and (3) pay related fees and expenses. As a result of these distributions, the holders of the Class A membership interests in Investors LLC and the participants in the 2004 Nortek Holdings, Inc. Deferred Compensation Plan are not entitled to any further distributions.

On May 10, 2007, the senior unsecured loan facility was not repaid and was extended until March 1, 2014. As a result of this extension, the Company paid a 2% rollover fee of approximately $4.5 million on May 10, 2007. The senior unsecured loan facility bears interest at LIBOR plus a spread, which spread increases over time, subject to a cap on the overall interest rate of 11% per annum. At March 31, 2007, the senior unsecured loan facility had an interest rate of approximately 8.9%. NTK Holdings has the option to pay interest in cash (“Cash Option”) or by adding interest to the principal amount of the loans under the senior unsecured loan facility (“PIK Option”). If the Company exercises the PIK Option with respect to any interest period, an amount equal to the unpaid interest accrued will be added to the principal amount of the senior unsecured loan facility and such accrued interest will be deemed to have been paid. Following an increase in the principal amount of the senior unsecured loan facility as a result of the payment through the PIK Option, the senior unsecured loan facility will bear interest on such increased principal amount. The Company must elect the form of interest payment for each interest period. Since the initial borrowing on May 10, 2006, the Company has elected the PIK option to increase the principal amount of the senior unsecured loan facility for the interest accrued during the applicable interest periods. As a result of exercising this PIK Option, the Company recorded approximately $4.7 million of accrued interest for the first quarter ended March 31, 2007, as additional indebtedness relating to the senior unsecured loan facility. At March 31, 2007 and December 31, 2006, the outstanding principal balance on the senior unsecured loan facility was approximately $220.7 million and $216.0 million, respectively. The senior unsecured loan facility is not guaranteed by any of the NTK Holdings’ subsidiaries and is not secured by any assets of NTK Holdings or any of its subsidiaries.

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.

At March 31, 2007, the Company had approximately $47.6 million available for the payment of cash dividends, stock purchases or other restricted payments (“Restricted Payments”) under the terms of the indenture governing the Company’s 10 3/4% Senior Discount Notes’ and the agreement governing the Company’s senior unsecured loan facility. Restricted Payments to NTK Holdings and Nortek Holdings from Nortek are limited by the terms of Nortek’s most restrictive loan agreement, Nortek’s senior secured credit facility. The amount available for such payments under Nortek’s senior secured credit facility was approximately $156.5 million at March 31, 2007.

(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 February 22, 2006, the Company, through Linear, acquired the assets and certain liabilities of Furman Sound, Inc. (“Furman”) for approximately $3.3 million. Furman is located in Petaluma, CA and designs and sells audio and video signal processors and innovative power conditioning and surge protection products.

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 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.

Unaudited net sales, operating earnings and pre-tax earnings for the Company’s segments for the first quarter ended March 31, 2007 and April 1, 2006 were as follows:

	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		(6.7	)		(6.8	)
Consolidated operating earnings		44.8			64.5
Interest expense		(42.3	)		(36.1	)
Investment income		0.4			0.7
Earnings before provision for income taxes	$	2.9		$	29.1

(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.

(2)

The operating results of the HVAC segment for the first quarter ended March 31, 2007 include a charge of approximately $1.8 million related to a reserve for amounts due from a customer.

Unaudited depreciation expense, amortization expense and capital expenditures for the Company’s segments for the first quarter ended March 31, 2007 and April 1, 2006 were as follows:

	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

(1)	Includes amortization of approximately $0.1 million for the first quarter ended April 1, 2006 of excess purchase price allocated to inventory recorded as a non-cash charge to cost of products sold.

(F)	The Company provides income taxes on an interim basis based upon the estimated annual effective income tax rate. The following reconciles the federal statutory income tax rate to the estimated effective tax rate of approximately 58.6% and 38.8% for the periods presented:

	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		17.2			---
State income tax provision, net of federal income tax effect		3.1			2.1
Tax effect resulting from foreign activities		2.3			1.0
Non-deductible expenses		0.9			0.7
Other, net		0.1			---
Income tax provision at estimated effective rate		58.6	%		38.8	%

As indicated in Note A, the Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of the adoption of this standard, the Company recorded a charge to retained earnings of approximately $3.2 million and also increased goodwill related to pre-acquisition tax uncertainties by approximately $3.8 million.

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.

As of January 1, 2007, the Company has accrued approximately $4.7 million of interest related to uncertain tax positions. As of March 31, 2007, the total amount of accrued interest and penalties is approximately $5.5 million. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

(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.

Changes in the Company’s combined short-term and long-term warranty liabilities during the first quarter ended March 31, 2007 and April 1, 2006 are as follows:

	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

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.

(H)	The Company records restructuring costs primarily in connection with operations acquired or facility closings which management plans to eliminate in order to improve future operating results of the Company.

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.

	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

Employee separation expenses are comprised of severance, vacation, outplacement and retention bonus payments. Other restructuring costs include expenses associated with terminating other contractual arrangements, costs to prepare facilities for closure, costs to move equipment and products to other facilities and write-offs related to equipment sales and disposals.

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.

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

Pension and profit sharing expense charged to operations aggregated approximately $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.

The Company’s unaudited net periodic benefit cost for its defined benefit plans for the first quarter ended March 31, 2007 and April 1, 2006 consists of the following components:

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

Service cost	$	0.1		$	0.3
Interest cost		2.4			2.3
Expected return on plan assets		(2.5	)		(2.3	)
Net periodic benefit cost	$	---		$	0.3

The Company’s unaudited net periodic benefit cost for its subsidiary’s Post-Retirement Health Benefit Plan for the first quarter ended March 31, 2007 and April 1, 2006 consists of the following components:

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

Service cost	$	---		$	0.1
Interest cost		0.1			0.3
Amortization of prior service cost		(0.1	)		(1.0	)
Net periodic post-retirement health income	$	---		$	(0.6	)

NTK HOLDINGS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FIRST QUARTER ENDED MARCH 31, 2007

AND THE FIRST QUARTER ENDED APRIL 1, 2006

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NTK Holdings, Inc. and its wholly-owned subsidiaries (individually and collectively the “Company” or “NTK Holdings”) are leading diversified manufacturers of innovative, branded residential and commercial products, operating within three reporting segments:

·	the Residential Ventilation Products, or RVP, segment,

·	the Home Technology Products, or HTP, segment, and

·	the Air Conditioning and Heating Products, or 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.

As used in this report, the terms “Company” and “NTK Holdings” refer to NTK Holdings, Inc., together with its subsidiaries, unless the context indicates otherwise. Such terms as “Company” and “NTK Holdings” are used for convenience only and are not intended as a precise description of any of the separate corporations, each of which manages its own affairs.

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

·	kitchen range hoods,

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

·	indoor air quality products.

The Home Technology Products segment manufactures and sells a broad array of products designed to provide convenience and security for residential and light commercial applications. The principal products sold by this segment include:

·	audio / video distribution and control equipment,

·	speakers and subwoofers,

·	security and access control products,

·	power conditioners and surge protectors,

·	audio / video wall mounts and fixtures,

·	lighting controls, and

·	structured wiring.

The Air Conditioning and Heating Products segment manufactures and sells heating, ventilating and air conditioning systems for site-built residential and manufactured housing structures, custom-designed commercial applications and standard light commercial products. The principal products sold by this segment include:

·	split system air conditioners and heat pumps,

·	furnaces and related equipment,

·	air handlers, and

·	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 unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of NTK Holdings, Inc. and all of its wholly-owned subsidiaries.

Acquisitions

The Company has made the following acquisitions since January 1, 2006:

Acquired Company	Date of Acquisition	Primary Business of Acquired Company	Reporting Segment

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

LiteTouch, Inc.	March 2, 2007	Design, manufacture and sale of automated lighting controls for a variety of uses including residential, commercial, new construction and retro-fit applications.	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 11, 2006	Design and sale of upscale range hoods.	RVP

Pacific Zephyr Range Hood, Inc.	November 11, 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) Increase in ownership to 60%

These acquisitions have been accounted for under the purchase method of accounting and accordingly, the results of these acquisitions are included in the Company’s Unaudited Financial Statements since the date of their acquisition.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Unaudited Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 information available from other sources, 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: