Nortek Inc. News Release

NORTEK REPORTS INCREASES
IN 1ST-QUARTER SALES

PROVIDENCE, RI, May 15, 2003--Nortek, Inc. ("Nortek"), a leading international designer, manufacturer and marketer of high-quality brand name building products, today announced first-quarter results.

On January 9, 2003, Nortek Holdings, the parent company of Nortek, was acquired by certain affiliates and designees of Kelso & Company L.P. and certain members of the Company's management in accordance with the Agreement and Plan of Recapitalization by and among Nortek, Inc., Nortek Holdings, Inc. and K Holdings, Inc. dated as of June 20, 2002, as amended, in a transaction valued at approximately $1.6 billion, including the Company's existing indebtedness (the "Recapitalization").

Net sales for the nine-day period ending January 9, 2003 and the period from January 10 to April 5, 2003 were $34 million and $435 million, respectively. Operating earnings (loss) for the nine-day period ending January 9, 2003 and the period from January 10 to April 5, 2003 were $(86.8) million and $35.4 million, respectively. EBITDA for the nine-day period ending January 9, 2003 and the period from January 10 to April 5, 2003 was $(85.9) million and $49.8 million, respectively. Excluding expenses and charges of approximately $87.7 million arising from the Recapitalization, as adjusted EBITDA was $1.8 million for the nine-day period ending January 9, 2003.

The 2003 first-quarter results presented below include the nine-day period from January 1 to January 9 (pre-Recapitalization) and the post-Recapitalization period from January 10 to April 5.

The Company's net sales from continuing operations for the combined periods of January 1 to April 5, 2003 were $469 million, an increase of 9.8 percent over the $427 million reported for the first quarter of 2002. Operating earnings (loss) for the combined periods from January 1 to April 5, 2003 was $(51.4) million compared to $37.7 million in the first quarter of 2002. As adjusted, EBITDA from continuing operations for the combined period from January 1 to April 5, 2003, excluding costs related to the Recapitalization, was $51.6 million, compared to $48.8 million for the prior year.

Our Residential Building Products Segment sales benefited from new products as well as strong performance in our core product lines such as bathroom exhaust fans. In addition, this segment has improved profitability, in part due to our continued strategic sourcing efforts.

Our branding strategy is continuing to produce results in our Air Conditioning and Heating Products Segment. In the first quarter of this year, we benefited from the recent introduction of our Westinghouse® and Maytag® brands and from the ongoing success experienced with our Frigidaire®, Tappan®, Philco® and Gibson® brands.

Our Windows, Doors and Siding Segment recorded net sales growth in vinyl siding, the core product line in this segment. However, profitability in this segment was adversely affected by several factors, including higher raw material costs, primarily for PVC resin, which is expected to continue for the balance of the year. We have several initiatives planned or already in place to mitigate the impact on 2003. These include some price increases and continued strategic sourcing and manufacturing cost-reduction programs. The profitability of this segment was also adversely impacted by direct and indirect costs associated with adding new distribution including new customers during the first quarter.

Richard L. Bready, Chairman and Chief Executive Officer, said, "We are pleased with our first-quarter performance, particularly considering the adverse weather conditions in the Northeast and Midwest, the impact of high energy costs, particularly on our resin-based materials and weak consumer confidence due to economic uncertainties. Improved sales performance in this quarter was driven by the ongoing stability of the housing construction and remodeling markets and the continuing benefit from our expanded branding effort in our line of air conditioning and heating products.

"Looking forward, we remain optimistic that new home construction and remodeling conditions will remain solid during the remainder of 2003. However, results could be impacted by the continued softness in the market for commercial HVAC products, the cost pressures for certain raw materials, such as resin and steel, and continued global economic weakness."

On January 17, 2003, Nortek's Linear Corporation subsidiary acquired the stock of ELAN Home Systems, L.L.C., a leading manufacturer and designer of high-performance consumer electronic equipment that controls whole-house entertainment, communication and automation systems for residential new construction and retrofit markets.

Nortek* (a wholly owned subsidiary of Nortek Holdings, Inc.) is a leading international manufacturer and distributor of high-quality, competitively priced building, remodeling and indoor environmental control products for the residential and commercial markets.Nortek offers a broad array of products for improving the environments where people live and work. Its products include range hoods and other spot ventilation products; heating and air conditioning systems; vinyl products, including windows and doors, siding, decking, fencing and accessories; indoor air quality systems; and specialty electronic products.

*As used herein, the term "Nortek" refers to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. This term is used for convenience only and is not intended as a precise description of any of the separate corporations, each of which manages its own affairs.


This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors impacting such forward-looking statements include the availability and cost of raw materials and purchased components, the level of construction and remodeling activity, changes in general economic conditions, the rate of sales growth, and product liability claims. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. For further information, please refer to the reports and filings of the Company with the Securities and Exchange Commission.


###


NORTEK, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
(Amounts in thousands)

For the Periods
Post-Recapitalization
 Pre-Recapitalization
January 10, 2003 - January 1, 2003 - January 1, 2002 -
April 5, 2003
 January 9, 2003
 March 30, 2002
(Unaudited)
 
Net sales     $ 435,201   $ 33,775   $ 427,212  
 
Cost of products sold    319,756    26,286    312,799  
Selling, general and administrative expenses, net    77,221    6,485    75,160  
Amortization of intangible asssets    2,810    137    1,505  
Expenses and charges arising from the  
  Recapitalization    --    87,700    --  
     399,787    120,608    389,464  
 
Operating earnings (loss)    35,414    (86,833 )  37,748  
Interest expense    (25,649 )  (2,288 )  (24,167 )
Investment income    435    121    1,719  
Earnings (loss) from continuing operations  
  before provision (benefit) for income taxes    10,200    (89,000 )  15,300  
Provision (benefit) for income taxes    4,000    (24,100 )  5,900  
Earnings (loss) from continuing operations    6,200    (64,900 )  9,400  
Earnings from discontinued operations    --    --    1,200  
Net earnings (loss)   $ 6,200   $ (64,900 ) $ 10,600  

The accompanying notes are an integral part of this unaudited condensed consolidated summary of operations.


A.

The unaudited condensed consolidated summary of operations for Nortek, Inc. and its subsidiaries (the "Company" or "Nortek"), in the opinion of management, reflects all adjustments necessary for a fair statement of the periods presented. In 2002, the Company sold certain subsidiaries of its wholly-owned subsidiary, Ply Gem Industries, Inc. ("Ply Gem"). The sale of these subsidiaries and their related operating results have been excluded from earnings from continuing operations and are classified as discontinued operations for all periods presented (see Note H). Certain amounts in the prior year's unaudited condensed consolidated summary of operations have been reclassified to conform to the current year presentation. It is suggested that this unaudited condensed consolidated summary of operations be read in conjunction with the consolidated financial statements and the notes included in the Company's latest annual report on Form 10-K and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission ("SEC"). (See Note C.)


 

On November 20, 2002, the Company reorganized into a holding company structure and each outstanding share of capital stock of the Company was converted into an identical share of capital stock of Nortek Holdings, Inc. ("Nortek Holdings"), a Delaware corporation formed in 2002, with Nortek Holdings becoming the successor company and the Company becoming a wholly-owned subsidiary of Nortek Holdings (the "Nortek Holdings Reorganization"). On January 9, 2003, Nortek Holdings, the parent company of Nortek, was acquired by certain affiliates and designees of Kelso & Company L.P. ("Kelso") and certain members of the Company's management (the "Management Investors") in accordance with the Agreement and Plan of Recapitalization by and among Nortek, Inc., Nortek Holdings, Inc. and K Holdings, Inc. ("K Holdings") dated as of June 20, 2002, as amended, (the "Recapitalization Agreement") in a transaction valued at approximately $1.6 billion, including all of the Company's indebtedness (the "Recapitalization"). (See Note C.)


 

Beginning on January 9, 2003, the Company and Nortek Holdings accounted for the Recapitalization as a purchase in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141"), which results in a new valuation for the assets and liabilities of Nortek Holdings and its subsidiaries based upon fair values as of the date of the Recapitalization. As allowed under SEC Staff Accounting Bulletin No. 54, "Push Down Basis of Accounting Required in Certain Limited Circumstances", the Company has reflected all applicable purchase accounting adjustments recorded by Nortek Holdings in the Company's Consolidated Financial Statements for all SEC filings covering periods subsequent to the Recapitalization ("Push Down Accounting"). Push Down Accounting requires the Company to establish a new basis for its assets and liabilities based on the amount paid for its ownership at January 9, 2003. Accordingly, Nortek Holdings' ownership basis (including the fair value of options rolled over by the Management Investors) is reflected in Nortek's Consolidated Financial Statements beginning upon completion of the Recapitalization. In order to apply Push Down Accounting, Nortek Holdings' purchase price of approximately $468,737,000 was allocated to the assets and liabilities based on their relative fair values and approximately $440,837,000 was reflected in the Company's Stockholder's Investment as the value of Nortek Holdings' ownership in the Company upon completion of the Recapitalization. Immediately prior to the Recapitalization, the Company's Stockholder's Investment was approximately $156,702,000. Purchase price allocations are subject to refinement until all pertinent information is obtained. As of January 10, 2003, the Company preliminarily allocated the excess purchase price over the net assets acquired in the Recapitalization based on its estimates of the fair value of assets and liabilities as follows:


Excess purchase price of the
Recapitalization allocated to
 
Inventories     $ 13,234,000  
Property, plant and equipment    102,474,000  
Intangible assets    72,953,000  
Goodwill       227,671,000  
Indebtedness    (33,777,000 )
Prepaid and deferred income taxes       (38,325,000 )
Pension    (32,195,000 )
Total   $ 312,035,000  

 

During the period from January 10, 2003 to April 5, 2003, the Company reflected approximately $5,400,000 of excess purchase price allocated to inventory as a non-cash charge to cost of goods sold, approximately $2,900,000 of lower depreciation expense in cost of sales, $1,500,000 of additional amortization expense of intangible assets and $1,400,000 of lower interest expense from the amortization of premium allocated to indebtedness as compared to the Company's historical basis of accounting prior to the Recapitalization.


 

The Company has estimated the fair value of its assets and liabilities, including intangible assets and property, plant and equipment, as of the Recapitalization, utilizing information available at the time that the Company's Unaudited Condensed Consolidated 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 outside third party appraisals of its intangible assets and property, plant and equipment.


 

The impact of these fair value estimates has been reflected in the Company's statement of operations for the period ended April 5, 2003. Should the intangible asset or property, plant and equipment appraisals result in differences in the average amortizable or depreciable lives of these assets or in the fair value amount of the estimates, the following estimated changes in annual operating earnings would occur:


Increase (decrease) in operating earnings
Property, Plant Intangible
and Equipment
 Assets
 Total
 
If lives are one year greater     $ 1,800,000 $ 800,000 $ 2,600,000
If lives are one year less       (2,100,000 )   (900,000 )   (3,000,000 )
If fair value is $10,000,000 greater       (800,000 )   (700,000 )   (1,500,000 )
If fair value is $10,000,000 less       800,000   700,000   1,500,000

 

The period from January 1, 2003 to January 9, 2003 and the period from January 10, 2003 to April 5, 2003 combined, contain 95 days while the first quarter of 2002 contained 90 days. Accordingly, operating results for 2003 include approximately $1,000,000 of additional interest expense as compared to 2002 since the Company accrues interest expense based on the number of days contained in each reporting period.


B.

EBITDA from operations is operating earnings from continuing operations plus depreciation and amortization expense (other than amortization of deferred debt expense and debt premiums and discounts) and the non cash write off of the portion of the excess purchase price from acquisitions allocated to inventories. Adjusted EBITDA excludes expenses and charges arising from the Recapitalization. EBITDA is presented as it is a common analytical measurement utilized by investors to assess the Company's performance.


 

The following table presents a reconciliation from operating earnings, which is the most directly comparable financial measure under accounting principles generally accepted in the United States, to EBITDA and Adjusted EBITDA for the periods presented:


For the Periods
Post-Recapitalization
 Pre-Recapitalization
January 10, 2003 - January 1, 2003 - January 1, 2002 -
April 5, 2003
 January 9, 2003
 March 30, 2002
(Amounts in thousands)
 
Operating earnings (loss)     $ 35,414   $ (86,833 ) $ 37,748  
Depreciation expense    6,151    831    9,589  
Amortization of intangible assets    2,810    137    1,505  
Non cash charge of purchase price  
    allocated to inventory    5,404    --    --  
EBITDA    49,779    (85,865 )  48,842  
Expenses and charges arising from the  
    Recapitalization    --    87,700    --  
Adjusted EBITDA   $ 49,779   $ 1,835   $ 48,842  

C.

On January 8, 2003, at a special meeting of stockholders of Nortek Holdings, the stockholders approved the following amendments to the certificate of incorporation (the "Stockholder Approval"), which were required in order to complete the Recapitalization:


 

Following the Stockholder Approval, common stock and special common stock held by the Management Investors were exchanged for an equal number of newly created shares of Series B Preference Stock. In addition, certain options to purchase shares of common and special common stock held by the Management Investors were exchanged for fully vested options to purchase an equal number of shares of the newly created Class A Common Stock. The remaining outstanding options, including some held by Management Investors, were cancelled in exchange for the right to receive a single lump sum cash payment equal to the product of the number of shares of common stock or special common stock underlying the option and the amount by which the redemption price of $46 per share exceeded the per share exercise price of the option.


 

On January 9, 2003, in connection with the Recapitalization, Kelso purchased newly issued shares of Series B Preference Stock for approximately $355,923,000 and purchased shares of Series B Preference Stock held by the Management Investors for approximately $18,077,000. Newly issued Class A Common Stock of approximately $3,262,000 was purchased by designated third parties. Shares of Series B Preference Stock held by the Management Investors that were not purchased by Kelso were converted into an equal number of shares of Class A Common Stock. In addition, the Company declared and distributed to Nortek Holdings a dividend of approximately $120,000,000 and distributed approximately $27,900,000 for reimbursement of fees and expenses of Kelso, which were paid out of the Company's unrestricted cash and cash equivalents on hand and were permissible under the most restrictive covenants with respect to the indentures of the Company's 8 7/8% Senior Notes due 2008, 9 1/4% Senior Notes due 2007, 9 1/8% Senior Notes due 2007 and 9 7/8% Senior Subordinated Notes due 2011 (the "Existing Notes").


 

Nortek Holdings used the proceeds from the purchase by Kelso and designated third parties of the newly issued Series B Preference Stock and Class A Common Stock and the dividend from Nortek to redeem Nortek Holdings' Class B Common Stock and to cash out options to purchase common and special common stock totaling approximately $479,185,000. Kelso also purchased directly from certain Management Investors 392,378 shares of Series B Preference Stock for approximately $18,077,000.


 

In connection with the Recapitalization, K Holdings received a bridge financing letter from a lender for a senior unsecured term loan facility not to exceed $955,000,000 (the "Bridge Facility"). The Bridge Facility was intended to be used to fund, if necessary, any change in control offers the Company might have made in connection with the Recapitalization. The Company did not use this Bridge Facility because the structure of the Recapitalization did not require the Company to make any change of control offers. The commitment letter expired on January 31, 2003. As a result, the Company's consolidated interest expense for the period from January 10, 2003 to April 5, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment fees and related expenses.


 

In January 2003, Nortek Holdings filed for the deregistration of its shares of common and special common stock under the Securities Exchange Act of 1934. Nortek Holdings' shares of common and special common stock are no longer publicly traded. The Company will continue to file periodic reports with the SEC as required by the respective indentures of the Company's Existing Notes.


 

Under the terms of one of the Company's supplemental executive retirement plans ("SERP"), the Company was required to make one-time cash payments to participants in such plan in satisfaction of obligations under that plan when the Recapitalization was completed. Accordingly, the Company made a distribution of approximately $75,100,000 to the participants in the plan from funds included in the Company's Consolidated Balance Sheet at December 31, 2002 and classified in long-term assets in restricted investments and marketable securities held by pension trusts and transferred to one of the participants a life insurance policy with approximately $10,300,000 of cash surrender value to satisfy a portion of the SERP’s obligation to such participant. The termination and settlement of the obligation of this SERP resulted in a curtailment loss on January 9, 2003. (See Note D.)


 

The total amount of transaction fees and related costs incurred by the Company and Kelso associated with the Recapitalization was approximately $47,348,000, including the $27,900,000 noted above, of which approximately $10,500,000 of advisory fees and expenses was paid to Kelso & Company L.P. A portion of these fees and expenses was recorded by the Company in selling, general and administrative expense, since they were obligations of the Company prior to the Recapitalization. Approximately $12,848,000 was recorded as expense on January 9, 2003 since these fees and expenses became obligations of the Company upon consummation of the Recapitalization. Approximately $6,600,000 of expense was previously recorded by the Company in the year ended December 31, 2002. (See Note D.)


 

The following reflects the pro forma effect of the Recapitalization for the periods presented through January 9, 2003. The period ending April 5, 2003 reflects the combined operating results of the Company pre- and post-Recapitalization for the period from January 1, 2003 to April 5, 2003. The combined operating results for the period ending April 5, 2003 include actual results of the Company for the period January 10, 2003 to April 5, 2003.


January 1, 2003 - January 1, 2002 - For the year ended
April 5, 2003
 March 30, 2002
 December 31, 2002
(Amounts in thousands)
 
Net sales     $ 468,976   $ 427,212   $ 1,888,292  
Operating earnings    36,233    34,734    196,768  
Earnings from continuing operations    5,065    4,576    64,572  
EBITDA:  
  Operating earnings    36,233    34,734    196,768  
  Depreciation expense    6,645    6,427    25,528  
  Amortization expense    3,044    3,045    12,181  
  Non cash charge of purchase price  
      allocated to inventory    5,404    5,167    6,018  
EBITDA   $ 51,326   $ 49,373   $ 240,495  

 

The unaudited pro forma condensed consolidated summary of operations for the periods presented has been prepared by adjusting the Company's historical summary of operations to give effect to the Recapitalization as if it had occurred on January 1, 2002. Fees, expenses and charges resulting from the Recapitalization, including the $6,600,000 noted above (see Note D), have been excluded from the above pro forma financial data since this pro forma data assumes that the Recapitalization occurred on January 1, 2002. The information contained in this unaudited pro forma condensed consolidated summary of operations has been prepared utilizing information available at the time that the Company's Consolidated Financial Statements were prepared and is subject to refinement until all pertinent information has been obtained. The unaudited pro forma condensed consolidated summary of operations reflects the Company's estimate of the effect of fair value adjustments for inventory, property, plant and equipment, intangible assets, pension, debt and financing costs and their related deferred tax attributes. The excess of the purchase price over the historical basis of net assets and these fair value adjustments was recorded as goodwill. Property, plant and equipment, intangible assets and certain other assets and liabilities and related tax attributes have been adjusted to fair value in the Company's consolidated balance sheet on April 5, 2003 based on Company estimates. Certain pertinent information related to the fair value of these items has not yet been obtained or completed. Pertinent information not yet obtained or completed includes, among other items, third party appraisals of intangible assets and property, plant and equipment, certain pension valuations and their related deferred tax attributes.


 

In the second quarter of 2002, approximately $4,400,000 was charged to operating earnings and is included in selling, general and administrative expenses relating to incentive earned by certain of the Company's officers under the Company's 1999 Equity Performance Plan. In the third quarter of 2002, the Company also incurred approximately $2,100,000 in connection with its re-audit of the Company's Consolidated Financial Statements for the three years ended December 31, 2001.


D.

For the nine days ended January 9, 2003, the Company incurred certain charges in connection with the Recapitalization. These charges were as follows:


Curtailment loss upon termination of a SERP     $ 70,142,000  
Recapitalization fees, expenses and other    12,848,000  
Compensation expense from the settlement and    
  cancellation of stock options    4,710,000  
    $ 87,700,000  

E.

Interest expense for the first quarter of 2002 includes a non-cash reduction in interest expense of approximately $450,000 related to the Company's interest rate collar agreement. The interest rate collar agreement was terminated in August 2002.


F.

On January 17, 2003, the Company acquired Elan Home Systems L.L.C. ("Elan") for approximately $17,400,000 in cash and a $1,500,000 note payable to the sellers. Elan manufactures and sells consumer electronic equipment that controls whole-house entertainment, communication and automation systems for new residential construction and retrofit markets. For the year ended December 31, 2002, Elan reported net sales of approximately $21,300,000 (unaudited). Pro forma results related to this acquisition have not been presented as the effect is not material.


G.

Net sales, operating earnings and pre-tax earnings from continuing operations for the Company's segments for the periods presented were as follows:


For the Periods
Post-Recapitalization
 Pre-Recapitalization
January 10, 2003 - January 1, 2003 - January 1, 2002 -
April 5, 2003
 January 9, 2003
 March 30, 2002
(Amounts in millions)
 
Net sales:                
Residential building products   $ 184 .5 $ 16 .4 $ 180 .0
Air conditioning and heating products    151 .6  8 .6  147 .8
Windows, doors and siding products    99 .1  8 .8  99 .4
     Consolidated net sales   $ 435 .2 $ 33 .8 $ 427 .2
 
Operating earnings (loss):  
Residential building products     $ 27 .0 $ 2 .7 $ 27 .9
Air conditioning and heating products    16 .5  (1 .2)  13 .5
Windows, doors and siding products*       2 .1   (0 .3)   6 .8
    Subtotal    45 .6  1 .2  48 .2
Unallocated:  
Expenses and charges arising from the  
  Recapitalization    --    (87 .7)  --  
Strategic sourcing expense    (1 .4)  (0 .1)  --  
Other, net    (8 .8)  (0 .2)  (10 .5)
    Consolidated operating earnings (loss)    35 .4  (86 .8)  37 .7
Interest expense    (25 .6)  (2 .3)  (24 .1)
Investment income    0 .4  0 .1  1 .7
Earnings (loss) before provision (benefit)    
  for income taxes   $ 10 .2 $ (89 .0) $ 15 .3

* The operating results of the Windows, Doors and Siding Products Segment for the period from January 10, 2003 to April 5, 2003 includes approximately $500,000 of severance and other costs associated with the closure of a manufacturing facility and approximately $1,300,000 of costs and expenses for expanded distribution including new customers.

 

Depreciation and amortization expense, the non cash inventory write off of a portion of allocated purchase price and capital expenditures from continuing operations for the Company's segments for the periods presented were as follows:


For the Periods
Post-Recapitalization
 Pre-Recapitalization
January 10, 2003 - January 1, 2003 - January 1, 2002 -
April 5, 2003
 January 9, 2003
 March 30, 2002
 
Non cash inventory write off of a portion                
  of allocated purchase price:  
Residential building products   $ 3 .4 $ --   $ --  
Air conditioning and heating products    0 .6  --    --  
Windows, doors and siding products    1 .4  --    --